Overcome transfer pricing compliance issues
In 2015, the Organisation for Economic Co-operation and Development (OECD) finalised the Base Erosion and Profit Shifting (BEPS) package. For the first time, all G20 and OECD countries have worked together to design common responses to international tax challenges. The three-tiered approach - local file, master file and country-by-country - was one of the achievements of this collaboration. Many countries have since incorporated the three-tiered approach recommendations into their local transfer pricing legislation. This has not only led to increasingly strict documentation requirements in many jurisdictions, but has also significantly increased the tools at the disposal of tax authorities to make transfer pricing risk assessments. In fact, tax authorities all over the world have been investing significant amounts of resources into the system, including hiring data analytics specialists to conduct economic and statistical analyses on the information that they are now able to access.
A multi-jurisdictional hot topic for businesses and regulatory authorities
Transfer pricing challenges abound for multinational enterprises (MNEs) and there is much at stake. There has been a marked increase in information that is exchanged between competent authorities. Furthermore, transfer pricing audits are increasingly conducted on a simultaneous and multi-jurisdictional basis. These factors, including an increased media focus, have contributed to the current situation, where a spotlight is being shone on the transfer pricing practices and policies applied by MNEs. The management of transfer pricing risk and tax reputation is a boardroom concern that is only likely to increase over time. This is not just important when dealing with tax authorities, but also in other matters, such as when negotiating with prospective buyers.
Due to the new transfer pricing legislation, there are many MNEs that are grappling with compliance matters on a global scale for the first time. These transfer pricing requirements have also created unprecedented levels of transparency. MNEs now have to spend significant amounts of time and money to be compliant, reduce the risk of penalties and prevent a reversal of the burden of proof. In addition, because transfer pricing has not necessarily been prioritised in the past, some companies may discover, after a careful review of their operations, that their transfer pricing model is not necessarily aligned with the business model. When the allocation of profits and losses do not correspond to risk management functions and value-creating activities, preparing solid transfer pricing documentation becomes challenging or even impossible.
Gaining a better understanding mitigates risk
There are also many MNEs that are generally well versed in global transfer pricing planning and compliance matters. They understand the added value of having a sustainable transfer pricing policy in place, and also have a clear strategy to deal with the new regulations. These companies are generally better equipped to deal with transfer pricing than the 'relative newcomers'. However, due to rapid changes in business models, as well as a renewed focus on functions and risk management, even these MNEs are obliged to constantly review and adapt their transfer pricing models to adhere to new business and tax realities, so that they can proactively mitigate transfer pricing risk.
A strategic and consistent approach across the jurisdictions where an MNE operates is an essential element in dealing with this matter head-on. Having a sustainable transfer pricing model leads to the mitigation of risk, and helps to strike a balance between a healthy corporate image and tax optimisation.