by John Kim and Justin Stallard
RSM is an IMA member tax, audit, and consulting service…
Sales of U.S. vehicle reached an all-time high of over 17.5 million units in 2016. This represents nearly a 70 percent increase from the 10.4 million units sold in 2009, the lowest-reported sales year in several decades.1 The ensuing leveling off and expected future decline in vehicle sales growth combined with continued cost pressures from the OEMs have created significant margin pressures for many Tier 1 and Tier 1 automotive suppliers. For suppliers engaging in significant cross-border transactions, these dynamics have created an inevitable transfer pricing challenge.
Transfer pricing continues to be one of the most significant tax risks faced by multinational companies, especially as it concerns base erosion and profit sharing (BEPS) standards. Since the implementation of BEPS policies in 2015, enforcement efforts are on the rise throughout the world. Most jurisdictions have specific transfer pricing disclosure and documentation rules; in addition, they are performing transfer pricing audits focused on risk (i.e., materiality, transaction type, quality of available documentation, jurisdictions involved, audit history and the like). Upon request for documentation by the tax authority, a taxpayer is given a limited amount of time to comply with the request. For example, the United States and Japan allow 30 days for compliance; China allows 20 days; Mexico, 15 days.
Suppliers could see tax and financial exposure
Companies engaging in significant cross-border transactions often adopt a transfer pricing methodology that relies on overall profitability of the company to determine if cross-border pricing is appropriate. The end result of a transfer pricing study, in general, is a range of profitability, typically expressed as a percentage of revenue or a percentage of costs or percentage of assets. As the OEMs push cost-downs on their suppliers, operating margins can fall outside of an acceptable range of profit outlined by a company’s transfer pricing documentation. This can create exposure for suppliers in the United States and abroad. Given the dollar volume of cross-border transactions in which many suppliers engage, this can lead to significant tax and financial reporting considerations.
Automotive suppliers experiencing margin pressures should act quickly to review their current transfer pricing approach and consider their alternatives in advance of generating significant tax and financial reporting liabilities. Options such as adjusting transfer prices, evaluating alternative transfer pricing approaches or simply accruing for any tax exposure in a given jurisdiction should be closely evaluated in order to avoid year-end tax and financial reporting surprises.
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