Transfer pricing is undoubtably a key focus area in the international business community. Supply chain transformation, trade wars and regionalisation have created growing tax complexities. Multinational companies of all sizes need to constantly take steps to ensure that they are in a competitive position in this area. No matter how transparent the practices of a group are, the increased focus by all governments on transfer pricing increases scrutiny and possible audits. It is therefore crucial for all MNE’s to ensure that they have proper transfer pricing documentation (local file, master file and Country-by-Country Reporting, CbCR) in place.
For many it is a struggle to compile TP documentation because of the complexity and the scale of the documentation. In general, many employees and legal entities across the world are involved in the process, while locally transfer pricing is unfortunately often viewed as a lesser priority. On a practical level we have seen organisations struggle by suffering from the uncontrollable process of Word-files being sent back and forth and excerpts from TP documentation manually being copy-pasted and shared via e-mail. This results in a high risk of non-compliance and not having all documents centrally in place in case of an audit. With increased scrutiny in cross border transactions its key to have a global transfer pricing strategy that effectively deals with the challenges of transfer pricing. This strategy is essential as transfer pricing includes accounting for services, intercompany financing, intangible valuation and their license, cost allocations, amongst other things.
A good starting point is to know and respect the OECD guidelines. The OECD have given transfer pricing guidelines since 1995. These regulations have been consistently updated to addresses the practical administration of transfer pricing programmes by tax administrations. The reports guide the management of transfer pricing programmes, so that transfer pricing audits and enquiries are conducted efficiently and in a timely manner, for the benefit of MNEs and tax administrations alike. It is concerned with the practical steps tax administrations need to take to correctly identify transfer pricing cases that merit audit or enquiry and then to progress those cases to as early a conclusion as possible. The January 2022 edition of the OECD guidelines on transfer pricing includes the revised guidance on the application of the transactional profit method and the guidance for tax administrations on the application of the approach to hard-to-value intangibles agreed in 2018, as well as the new transfer pricing guidance on financial transactions approved in 2020.
Legal challenges will increase
The US Inflation Reduction Act of 2022 that offers funding, programs, and incentives to accelerate the transition to a clean energy economy. Under the Inflation Reduction Act (IRA), signed into law in August 2022, the IRS received an $80 billion appropriation. The tax agency plans to use half of this amount in compliance enforcement, and this may include increased scrutiny of multinational companies’ transfer-pricing activities.
Staying up to date with international tax developments, such as changes to transfer pricing guidelines, BEPS initiatives, and country-specific regulations is essential. This is because of the increased scrutiny and the complexity of the field. It is inevitable that challenges will occur. To effectively deal with the challenges calls for a proactive and continues outlook on transfer pricing. Every country where your multinational operates in have different regulations and guidelines. Its of key importance that your team have knowledge of the documentation requirements, transfer pricing methods accepted, and compliance obligation.
On a legal level Advance Pricing Agreements (APAs) would help you in minimizing challenges. APA’s are agreements between taxpayers and tax authorities that establish the acceptable transfer pricing methodology for a set of transactions over a specified period. Consider entering into APAs with tax authorities to provide certainty and minimize the risk of transfer pricing disputes. APAs can help avoid future legal issues by obtaining upfront agreement on transfer pricing methods.
It’s good to have contact with local tax advisors for when disputes occur and regulations changes. In case of transfer pricing disputes or tax audits, it is essential to have a strategy in place to resolve conflicts effectively. Engage experienced transfer pricing professionals and legal counsel who specialize in transfer pricing litigation. Consider alternative dispute resolution mechanisms, such as mediation or arbitration, to seek a mutually acceptable resolution with tax authorities. If necessary, be prepared to defend your transfer pricing positions in court.
Some further key tips in dealing with the challenges:
- Having a deep understanding: Multinationals need a solid understanding of the principles, regulations, and guidelines governing transfer pricing in a specific jurisdiction. The company need inhouse or consultant experts to guide on the arms-length principle, documentation requirements, and relevant tax regulations.
- Strategy implementation: It is essential to have a clear and consistent transfer pricing strategy that aligns with your company’s overall business strategy and complies with applicable regulations. The strategy should define the transfer pricing methods, benchmarks, and documentation requirements to be followed.
- Understand the risks: Identify potential areas of risk and exposure in your company’s transfer pricing practices. Evaluate the transactions, business operations, and jurisdictions involved to determine where potential challenges may arise. Transfer pricing software can assist in evaluating potential risks and identifying areas of concern in transfer pricing arrangements. It can facilitate scenario modelling to assess the potential impact of different pricing strategies and help optimize transfer pricing outcomes.
- Use benchmarks: Conduct thorough benchmarking studies to compare your company’s transfer prices with those of independent companies in similar circumstances. Ensure that the comparable selected are reliable and representative of the industry and market conditions.
- Be updated: Regularly review and update your transfer pricing policies and documentation to reflect changes in your business, industry, and regulatory environment. Stay informed about new transfer pricing developments and guidance issued by tax authorities.
- Update intercompany agreements: Review and update or create them. It is important to add this substance to support your arm’s length transactions between affiliates.
- Use technology: Software solutions like TP Genie from Intra ricing solutions could assist your company to streamline operations and guide you to comply with the regulations from tax authorities. Transfer pricing software can help streamline data collection and management processes. It can integrate with various financial systems to gather relevant data and centralize it in one place, making it easier to access and analyze.
- Save time and energy: Transfer pricing software often provides templates and tools for preparing transfer pricing documentation, including local country reports, master files, and country-by-country reporting. These tools can help ensure compliance with local regulations and facilitate the documentation process. Some transfer pricing software includes functionalities to automate the analysis of comparable transactions, allowing for efficient benchmarking. These tools can help determine an appropriate transfer pricing method and support the selection of arm’s length prices.
Collaboration is key
Technology solutions can enhance collaboration and communication among different stakeholders involved in transfer pricing, including tax teams, finance departments, and business units. Centralized platforms enable easy sharing of information, supporting effective decision-making and alignment of transfer pricing policies. Transfer pricing software can assist in monitoring and tracking compliance with transfer pricing policies, regulations, and deadlines. It can provide alerts and reminders for key dates, ensuring timely submission of required documentation and filings.