According to EY’s 2013 global transfer pricing survey, Navigating the choppy waters of international tax, 66 per cent of companies identified risk management as their highest priority for transfer pricing, up 32 per cent from the same survey conducted in 2010.
The report was compiled based on interviews with transfer pricing and tax professionals at 878 corporations in 26 countries, including 637 parent companies.
The report also finds that companies are experiencing a significant increase in unresolved transfer pricing examinations and facing increased penalties and interest when tax authorities formulate assessments.
Managing transfer pricing in emerging markets is a rising priority for multinational companies, even though 74 per cent of those surveyed said they have no full-time transfer pricing personnel in those countries.
“Our survey indicates a clear shift towards prioritising risk management in transfer pricing, which is hardly surprising given the current environment around tax controversy,” says John Hobster, EY’s Global Head of Accounts for Transfer Pricing.
“We believe the environment will remain difficult for the next several years, and companies should prepare by making sure they have the right people and the right systems in the right places to properly manage the new sources of risk.”
Nearly half of the survey respondents (47%) reported experiencing double taxation as a result of a transfer pricing audit. Twenty-four per cent of parent companies reported being subject to tax penalties in the past three years, in comparison with 19 per cent in the 2010 survey and 15 per cent in a 2007 edition of the survey. Sixty per cent of parent companies are also paying interest charges as a result of transfer pricing adjustments.
More than one in four (28 per cent) said they had sought assist-ance from their own governments to mitigate dispute with another country’s tax authority – double the amount when compared to the 2010survey. The survey found evidence that companies are struggling to align their resources with sources of controversy, particularly in emerging markets. Companies are also reporting a 15 per cent increase in litigation, up from just 4 per cent in 2007.
Among companies with operations in Brazil, Russia, India, China or countries in Africa, 30 per cent identified those areas as their number-one or number-two priorities in terms of managing transfer pricing matters.
At the same time, companies say they are strengthening efforts to comply. Of all respondents surveyed, 70 per cent indicated that they are fully compliant with transfer pricing requirements and regulations. Yet fewer than 20 per cent of companies say they monitor their financial results for compliance with their transfer pricing policies in real time or on a monthly basis, which is optimal.
A few other companies have computer software in place to simplify and automate their compliance activities.
The report makes several recommendations to companies seeking to better manage risk and the compressed transfer pricing life cycle. They include developing high-standard documentation in a wider range of countries, considering how other tax enforcement mechanisms may affect transfer pricing, and better aligning resources to better respond to increased transfer pricing documentation requirements and controversy in rapid-growth markets.
Thomas Borstell, EY’s Global Director of Transfer Pricing Services, concludes: “The survey clearly shows companies are struggling to comply with the vast and ever-changing array of transfer pricing rules so they aren’t doubly taxed. “To succeed, they will need to take proactive steps to enhance their documentation, monitor changes around the world, and upgrade their technology to expedite analysis of financial results.”