A transfer price is the price charged for goods, services or intangibles that are sold or transferred between related legal entities within a multinational enterprise. Transfer pricing regulations require that a transfer price be arm’s length, meaning that the transfer price must be consistent with the price that would have been charged to an unrelated party.
Though transfer pricing regulations have long been in place across the globe, there have been several recent developments that have made transfer pricing one of the riskiest areas for multinational companies from a compliance and tax planning standpoint.
Within the past five years, the IRS has created the leadership position of Transfer Pricing Director. The Transfer Pricing Director sets transfer pricing policy in IRS audits and works with Chief Counsel to develop transfer pricing litigation strategy. A Chief Economist position was also created to assist the Transfer Pricing Director in setting IRS-wide transfer pricing policy. The IRS has also added staff to expand its international audit coverage and transfer pricing specialists. As a result, the IRS is increasing its audits of transfer pricing of multinational companies, both large and small.
The U.S. Treasury Department has also been actively engaged in the OECD’s Base Erosion and Profit Shifting (“BEPS”) project. BEPS is the practice of artificially shifting income into tax-advantaged environments, generally through the abuse of transfer pricing. In 2013, the OECD and G20 countries adopted an action plan to address BEPS, and over the course of 2014 and 2015, they have released a 15 point action plan in draft form. A coherent package is to be delivered to the G20 Finance Ministers in October 2015, with a plan for follow-up work and a timetable for implementation.
Though the BEPS Actions have not been finalized, legislation around the Actions has been taking shape. Specifically, Action 13 provides guidance on transfer pricing documentation that includes a master file, a local file, and a country-by-country report. The German government has recently announced plans to incorporate Action 13 into tax legislation. The aim is to have this legislation in place for tax year 2016. On July 8, 2015, the European Parliament approved a draft resolution that would require companies to publicly disclose profits or losses before tax on a country-by-country basis. A few days later, a new Corporate Income Tax Regulation (“CITR”) was approved in Spain. The CITR introduced new transfer pricing reporting requirements that largely reflect the recommendations of BEPS Action 13, with its focus on country-by-country reporting, and expanded reporting requirements on a master file and local file. Mexico, Brazil and Poland have also introduced legislation related to the BEPS Actions, with more countries to follow suit.
Though large companies, such as Glaxo-SmithKline, Microsoft, Apple, Amazon, and Starbucks have made headlines related to transfer pricing disputes, the increased scrutiny by global tax authorities will also have an impact on even the small manufacturing company in New Bedford, MA that is looking to expand overseas.
The OECD BEPS Actions and subsequent legislation marks a defining moment for transfer pricing. Multinational companies will have to make significant changes to manage the additional compliance requirements. Tax executives should work with their advisors to get out in front of the reporting requirements, which include increased audit scrutiny, country-by-country reporting and new anti-avoidance legislation.