by Tansy Jefferies
RSM US LLP is an IMA Member
Following the issuance of the Organisation for Economic Cooperation and Development’s reports on Base Erosion and Profit Shifting (BEPS), governments around the world are examining transfer pricing practices with much greater scrutiny in order to ensure that the attribution of profits is aligned with value creation. Furthermore, various U.S. tax reform provisions enacted in late 2017 could create adverse tax consequences for certain related-party transactions, or conversely they may now present planning opportunities. In light of this new and continually-evolving transfer pricing environment, these are the top six transfer pricing issues that multinationals should consider:
- Have You Appropriately Assessed Your Level of Transfer Pricing Risk?
Many factors can affect the level of a company’s transfer pricing risk, and it is critical to gain a clear understanding of where your transfer pricing risk lies in order to mobilize the appropriate resources to mitigate such risk. Some factors to consider may include (but are not limited to):
Transaction size. $1 million transactions are likely to receive much greater scrutiny than $100,000 transactions.
Nature of the transactions. The tax authorities will perceive that transactions involving intangibles present higher potential for abuse than sales of inventory.
Tax attributes of the taxpayer. Entities that consistently report losses are more likely to attract the attention of tax authorities looking for taxpayers with faulty transfer pricing as opposed to entities that report consistent profits.
Impacted jurisdictions. Certain jurisdictions take a more aggressive approach to enforcing transfer pricing regulations than others.
- Is Your Transfer Pricing Policy Tax-Efficient?
While transfer pricing rules can be complex and can impose many documentation requirements, they present significant opportunities for taxpayers to minimize their tax burden. In many cases, an economic study will unearth opportunities to adjust transfer pricing practices in a way that reduces a company’s overall global tax burden. Without a thorough analysis, these opportunities may be lost.
- Do You Have Appropriate Support for Your Transfer Pricing Policy?
Depending upon the perceived level of risk associated with the pricing of intercompany transactions, taxpayers should ensure they have an appropriate level of documentation to justify their intercompany pricing. For example, this support may be in the form of a full transfer pricing study, a benchmarking analysis, or an analysis of certain similar transactions that the taxpayer enters into with third parties. Furthermore, taxpayers should be aware of changing documentation requirements around the globe in light of BEPS; prior transfer pricing documentation may no longer be compliant with new regulations.
- Do You Have Appropriate Intercompany Agreements in Place?
It is very important to memorialize the terms and conditions of various related-party transactions through formal intercompany agreements in order to mitigate the risk that the tax authorities will recharacterize the underlying transactions. This is particularly important in relation to intercompany financing arrangements and licensing of intangible property, as well as services transactions.
- Are You Implementing Your Policy in Line with Your Transfer Pricing Documentation and Intercompany Agreements?
Having a transfer pricing study and intercompany agreements in place is only the starting point. If a taxpayer’s facts are not consistent with the taxpayer’s transfer pricing documentation, the documentation will provide no protection in an audit. Appropriately implementing and ensuring the accuracy of the facts presented in your study are critical.
- Are You Considering the Impact of Transfer Pricing on Other Direct and Indirect Taxes?5
Not only does transfer pricing impact the income tax position of the taxpayer and the associated related parties, it can also impact customs and import duties, withholding taxes and value-added taxes. Thus, any transfer pricing planning must take into account both direct and indirect obligations of the taxpayer.
In summary, while going abroad can create huge business opportunities, paying close attention to transfer pricing requirements will allow companies to maximize their tax-efficiency and mitigate risk. Even taxpayers that have a policy in place should consider refreshing their transfer pricing analysis, particularly in light of the changing regulatory environment.
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