With the release of the OECD’s Base Erosion and Profit Shifting (BEPS) action plan on October 5th, transfer pricing has been at the top of the minds of many tax executives. The plan is one of the largest scale efforts in history to standardize tax laws across national borders. As a result, audits may become more aggressive as tax authorities implement the OECD’s recommendations.
Multinational companies will have to make significant changes to manage the additional compliance requirements. For many years, businesses accepted minimal transfer pricing adjustments just so they can close out an audit. However, adjustments have now become so material that businesses cannot merely disregard them. For instance, the IRS recently assessed Coca-Cola an additional $3.3 billion in federal income-tax liability related to its transfer pricing.
What Are Other Companies Doing to Handle the Increased Transfer Pricing Burden?
Companies are working with their advisors to get out in front of the increased reporting requirements, which will include a global master file, local files and country-by-country reports. Tax executives are having internal discussions and addressing transfer pricing with their boards of directors. Companies are also hiring more staff internally to manage transfer pricing. A number of companies are looking to Advance Pricing Agreements with tax authorities in order to gain greater certainty on transfer pricing going forward.
Is an Advance Pricing Agreement Right for My Company?
An Advance Pricing Agreement (APA) is a mutual agreement between a taxpayer and a tax authority on an appropriate transfer pricing approach for a selected intercompany issue. An APA can cover prior years, as well as several years going forward. APAs have long been thought to be only for the largest and most sophisticated taxpayers. However, APAs are gradually being seen as a defensive approach for companies of all sizes. In August the IRS released updated procedures for APAs with an eye toward making the process more comprehensive and straightforward. The IRS has also made a concerted effort to conclude more APAs. The main benefit of an APA is the certainty that it provides. A bilateral or multilateral APA would also address the inconsistency of transfer pricing rules across countries and would mitigate the risk of double taxation. An APA can be time consuming and costly, however, transfer pricing audits are also onerous and expensive, with audits that can approach three to four years to complete.
Are My Transfer Pricing Policies and Procedures Up to Date?
Companies commonly prepare a transfer pricing policy, and then let it sit for a few years. However, if a transfer pricing policy is to have any worth, it should be reviewed on a rolling basis. The policies should at least be reviewed when there is a restructuring, acquisition, or divestiture. A regular transfer pricing review will ensure that all intercompany transactions undertaken within a multinational company are captured and will prevent any undesirable revelations during an audit. A fresh review may also help identify new tax and business opportunities that may have gone unnoticed.
Is Your Transfer Pricing In Line With Your Enterprise Resource Planning (ERP) Software?
Many multinational companies operate their intercompany offline, mostly on Excel spreadsheets. As a result, their IT systems are not integrated with their transfer pricing policies. In such situations, businesses may find themselves having to make year-end adjustments that can create havoc on the planned versus actual level of profits in various taxing jurisdictions of a multinational enterprise. In an era of increased transfer pricing reporting requirements, a solution is to integrate the transfer pricing structure into the Enterprise Resource Planning architecture. ERP integration will improve data quality by centralizing data in one place, remove data redundancy, replace manual activity and provide greater internal controls.
What are Common Issues that May Trigger a Transfer Pricing Audit?
Any intercompany transaction may trigger a transfer pricing audit; therefore, all intercompany transactions should have proper documentation. However, a tax authority may pay more attention when there is (i) any type of corporate restructuring; (ii) substantial intercompany transactions with related parties with locations in low-tax jurisdictions or tax havens; (iii) chronic year-end adjustments; (iv) presence of a low effective tax rate in the published financial statements; and (v) discrepancies between intercompany agreements or transfer pricing policies and the intercompany invoices.
For any questions regarding the recent transfer pricing developments or anything discussed in this article, please reach out to one of our transfer pricing experts, Andrew Bostian, at firstname.lastname@example.org, or 617-658-5232.
Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statues, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.