The changing landscape of transfer pricing
In a rapidly changing global economy, companies must properly report and document international activity. In this video, Tansy Jefferies and Enrique Rayon from RSM’s international tax practice talk about how transfer pricing has changed and how companies must adjust. Visit our resource center for more on Base Erosion and Profit Shifting.
The changing landscape of transfer pricing: What you need to know...in a nutshell
Transfer pricing is a key element of any international tax strategy, but the world moves quickly. There have been a lot of changes recently in light of new guidance emanating from BEPS, the global base erosion and profit shifting project. Having the right plan in place is critical for your business.
How does the approach to transfer pricing differ based on recent changes in policy?
There are two approaches. There's the economic approach, and then there's the documentation approach. Nowadays the emphasis is on both, but let’s focus on the documentation approach. The tax authorities are focusing more on transparency; that's a result of the new BEPS action plan.
Greater transparency. What does that mean? It means that companies should focus on a new format of documentation. There's more content, there's more disclosure, there's more to write.
Country by country reporting is now going to be required of U.S. parent companies of multi-national groups, with global revenues in excess of $850 million. In light of this heightened scrutiny, it's time for a more holistic approach to global transfer pricing documentation.
Is there a higher risk of audit due to the Base Erosion and Profit Shifting project?
There's no doubt that BEPS has shined a light on multinational activity and on the middle market. All tax authorities, including the IRS, are going to be more focused on transparency.
With regard to U.S. audits, we're finding that the IRS is no longer taking the transfer pricing documentation study at face value. They're focused on understanding whether the conduct of the parties aligns with what you're actually documenting in your study. There's a greater level of verification of the economic conduct of the parties. Is the transfer pricing appropriate and is it aligned with value creation?
What do I need to do now?
Revisit your study. If you already have a transfer pricing study in place, it may be dated. This is an event that needs to be analyzed, updated and refreshed. Transfer prices cover everything, from services to products to intangible properties. These are complex matters. I would recommend revisiting your study and making sure it is up to date. In addition, revisit what's going on in other countries. Different countries apply the rules in their own ways.
As you consider tax compliance going forward, a transfer pricing documentation study should be part of that plan, so get in touch.