Ongoing evolution of transfer pricing

August 2018 | FEATURE | CORPORATE TAX

Financier Worldwide Magazine

August 2018 Issue

Rapid change is the norm in the world of transfer pricing (TP). Uncertainty has also become something of a standard, with populist shocks in the US and the UK, as well as tax overhaul legislation – such as the Organisation for Economic Cooperation and Development’s (OECD) base erosion and profit shifting (BEPS) Action Plan – significantly impacting the TP landscape.

In ‘Top 5 Transfer Pricing Trends for 2018’, Thomson Reuters offers its take on the trends shaping TP. First, data management. Cloud solutions and the Internet of Things (IoT) will increase the data available to business, consumers and governments. Second, globalisation of tax. The OECD and the Automatic Exchange of Information (AEOI) means an uptick in compliance requirements. Third, internal collaboration – teams across the globe need to understand and align with company TP policies. Fourth, increasing threat of audit and litigation. Both are likely to increase with country-by-country reporting (CbCR). Finally, TP and brand hand-in-hand. TP is a political tool, interlinked with brand, and an essential part of a company’s public relations.

“In the last few years we have seen significant changes in the TP landscape,” says Ryan J. Kelly, a partner at Alston & Bird LLP. “Organisations such as the OECD have created action plans that call for increased transparency between taxing authorities, resulting in additional compliance burdens on companies. As tax authorities start sharing information with one another, it is important for multinationals to have sound TP policies in place. It is also important for legal, finance and tax departments to be aligned to ensure TP policies are implemented and followed consistently.”

Trends and strategies

Another trend that has recently emerged in the TP space is an increase in litigation. In the US, for example, cases involving companies such as Altera, Amazon, Medtronic, Coca-Cola and Facebook are influencing how organisations go about implementing their TP strategies. Furthermore, the recent passage of the Tax Cuts and Jobs Act (TCJA), which includes significant changes to Internal Revenue Code sections 367 and 482, may serve to embolden the Internal Revenue Service (IRS) to continue its high-profile TP activities.

“Prior to the TCJA, many US-based multinationals implemented tax-planning strategies to move profits into jurisdictions outside of the US with lower tax rates, and to take advantage of the deferral of tax on foreign earnings,” says Mr Kelly. “However, with the recent passage of the TCJA and lower tax rates in the US, some multinationals have changed their tax-planning strategies. This may result in changes to organisational structures and where intangible assets are located. The TCJA has also incentivised many US-based multinationals to repatriate cash held overseas.”

“While many taxpayers try to minimise their tax burdens within the boundaries of what the tax law allows, in TP, getting to the ‘right answer’ is not always as clear as black and white.”

According to Eduardo Gracia, a partner at Ashurst, in a post-BEPS world, it is likely there will be greater scrutiny by national tax authorities as to where added value is generated in the value chain, in order to avoid profit shifting through TP policies. “For taxpayers, this will entail enhanced documentation efforts and new reporting obligations, for example tax ruling exchanges and CbCR obligations and exchanges,” he contends. “However, subjectivity in the interpretation of data may generate legal uncertainty.”

Tax efficiencies and compliance

For many companies, accurately assessing the level of information disclosure required by TP guidelines and tax authorities in order to remain compliant is perhaps the most difficult challenge they face. “What used to be acceptable five years ago in terms of disclosure would probably be insufficient today for many tax authorities,” says Mr Gracia. “This suggests that companies’ in-house tax counsel need to request additional resources in order to continuously monitor this aspect of compliance.”

For Mr Kelly, the tax regulations that govern TP are among the most complex sets of rules. “While many taxpayers try to minimise their tax burdens within the boundaries of what the tax law allows, in TP, getting to the ‘right answer’ is not always as clear as black and white,” he suggests. “As a result, taxpayers and tax authorities often have differing views over what constitutes an arm’s length transfer price. The complexities of the various TP rules across different jurisdictions can make it challenging for taxpayers to legally minimise their taxes, while also remaining compliant with the rules as interpreted by tax authorities.”

Future trends

Going forward, there are a number of developments expected to substantially impact the TP space. These include the outcome of profit split method (PSM) discussions, TP on related-party financial transactions, the result of the ongoing peer review on the implementation of BEPS Action 5 regarding the exchange of information on tax rulings beyond EU borders, European Court of Justice (ECJ) developments on state-aid files that have been appealed, and the continued development of the arbitration procedure provided for in the Multilateral Instrument (MLI).

“The TP environment will continue to become more complex,” says Mr Kelly. “However, it is likely that many tax authorities will have insufficient resources to handle the number of TP matters that exist.”

Whether there is adequate official oversight or not, the upshot is that companies need to get to grips with an evolving TP environment, by ensuring compliance with new tax legislation and dedicating time to high-value-added activities.

Fraser Tennant