Following the Organisation for Economic Cooperation and Development's base erosion and profit shifting (BEPS) initiative, tax authorities worldwide seek more effective ways to protect and ensure that the attribution of profits is aligned with value creation.
Furthermore, various U.S. tax reform provisions in the Biden Administration FY22 budget, and the Treasury Department Greenbook explanation of Biden's tax proposals, could create adverse tax consequences for certain related-party transactions. Conversely, they may now present planning opportunities. With the exponential rise of comprehensive tax policies and demand for tax-related transparency in the transfer pricing landscape, these are the top six transfer pricing issues that multinationals should consider:
1. Have you appropriately assessed your level of transfer pricing risk?
Many factors can affect the level of a company’s transfer pricing risk, and it is critical to gain a clear understanding of where your transfer pricing risk lies in order to mobilize the appropriate resources to mitigate such risk. Some factors to consider may include (but are not limited to):
- Transaction size: $1 million transactions are likely to receive much greater scrutiny than $100,000 transactions.
- Nature of the transactions: The tax authorities will perceive that transactions involving intangibles present higher potential for abuse than sales of inventory.
- Tax attributes of the taxpayer: Entities that consistently report losses are more likely to attract the attention of tax authorities looking for taxpayers with faulty transfer pricing as opposed to entities that report consistent profits.
- Impacted jurisdictions: Certain jurisdictions take a more aggressive approach to enforcing transfer pricing regulations than others.
2. Is your transfer pricing policy tax-efficient?
While transfer pricing rules can be complex and can impose many documentation requirements, they present significant opportunities for taxpayers to minimize their tax burden. In many cases, an economic study will unearth opportunities to adjust transfer pricing practices in a way that reduces a company's overall global tax burden. Without a thorough analysis, these opportunities may be lost.
To help you identify the best fit for your organization, our transfer pricing advisors can assist you with:
- Planning: Develop a substance-based transfer pricing strategy to include execution of tax policies as early as possible.
- Compliance and documentation: Provide analysis and contemporaneous documentation for all related-party transactions to ensure compliance with the arm's length principle.
- Operational transfer pricing: Leverage internal technology platforms (e.g., ERP systems) to effectively streamline data flows, increase process efficiency and develop automated solutions for a more efficient transfer pricing lifecycle.
- Dispute resolution: Address transfer pricing disputes through transfer pricing examinations, appeals, and alternative processes, advance pricing agreements, the competent authority process, and arbitration.
3. Do you have appropriate support for your transfer pricing policy?
Depending upon the perceived level of risk associated with the pricing of intercompany transactions, taxpayers should ensure they have an appropriate level of documentation to justify their intercompany pricing. For example, this support may be in the form of a full transfer pricing study, a benchmarking analysis, or an analysis of certain similar transactions that the taxpayer enters into with third parties. Furthermore, taxpayers should be aware of changing documentation requirements in light of the global approach highlighted by the OECD pillar one and pillar two initiative; prior transfer pricing analysis and documentation may no longer be compliant with new regulations.
4. Do you have appropriate intercompany agreements in place?
It is very important to memorialize the terms and conditions of various related-party transactions through formal intercompany agreements in order to mitigate the risk that the tax authorities will re-characterize the underlying transactions. This is particularly important in relation to intercompany financing arrangements and licensing of intangible property, as well as services transactions.
5. Are you implementing your policy in line with your transfer pricing documentation and intercompany agreements?
Having a transfer pricing study and intercompany agreements in place is only the starting point. If a taxpayer's facts are not consistent with the taxpayer's transfer pricing documentation, the documentation will provide no protection in an audit. Appropriately implementing and ensuring the accuracy of the facts presented in your study are critical.
Our Operational transfer pricing (OTP) approach effectively streamlines data flows, increases process efficiency, and develops automated solutions to address your company's unique policy implementation needs. The results include proactive management of transfer pricing reporting, compliance, and improved operational model of your intercompany pricing, increased operational efficiency, and reduced risk.
6. Are you considering the impact of transfer pricing on other direct and indirect taxes?
Not only does transfer pricing impact the income tax position of the taxpayer and the associated related parties, it can also impact customs and import duties, withholding taxes and value-added taxes. Thus, any transfer pricing planning must take into account both direct and indirect obligations of the taxpayer.
What should you do now?
The prospect of tax reform and increasing demands from the global regulatory environment continues the drive for change in transfer pricing. In a highly complex regulatory environment, we strongly recommend taxpayers take a proactive approach to evaluate their transfer pricing arrangements, ensure ongoing compliance with the regulations, and maintain robust global documentation to mitigate the risk of an audit.