For operationalizing global transfer pricing, this is an era of transformation. Transparency is now the watchword, with tax authorities now having access to more data than ever before.
Meanwhile, new laws based on recommendations to curtail base erosion and profit shifting (BEPS) from the Organisation for Economic Co-operation and Development (OECD) are being written or legislated and enacted at a blistering pace.
“Over the past few years, companies have done a better job analyzing how transfer pricing affects their operations. But the levels of transparency and scrutiny that are just taking hold today are much more intense than what we’ve seen in the past.“
Peter Griffin, EY Global and Americas Transfer Pricing Leader
Put it all together and the likelihood and scale of controversy, and the level of resource required to address this, has only one place to go — higher.
So there’s much to attend to in order to tighten the internal position. In terms of prioritization, the key areas of focus identified by respondents to EY’s 2016-17 Transfer Pricing Survey include:
Establish a clear vision and strategy
Both the survey and anecdotal evidence point to the overwhelming importance of adopting a strategic approach to all that is happening.
As EY Global and Americas Transfer Pricing Leader Peter Griffin explains, “Over the past few years, companies have done a better job analyzing how transfer pricing affects their operations. But the levels of transparency and scrutiny that are just taking hold today are much more intense than what we’ve seen in the past.”
Consequently, says Griffin, “it really is time to take a step back to look at everything from a global perspective — the same perspectives are becoming available to tax authorities in every jurisdiction where you do business.”
The total picture, says Griffin, “has to tell a consistent global story, and that requires absolutely clear strategic vision of what the transfer pricing objectives are and how to achieve them.”
Evaluate and ensure data quality and accuracy
More than a third of executives, 37%, say their future work will include an intensive focus on making sure that data used for decision-making and provided to tax authorities is indeed accurate and reliable.
“Generating data and outputs that drag results from your systems reflective of the intended policies has cross-purpose benefits,” says Robbert Kaufman, EY Americas Transfer Pricing Market Leader.
“It gives comfort to both internal users for decision-making regarding resource allocation, key business decisions and performance reviews, whilst also to tax authorities in the event of an enquiry or audit, so they are comfortable that the outputs reflect the intended policy.”
Integrate more closely with business operations
Thirty-four percent of companies are building closer coordination between tax and business units.
The fact is, amid so much change, says Ronald van den Brekel, EY Global Head of Transfer Pricing Technology, companies have actually been handed somewhat of an operational opportunity, in particular from the OECD’s focus on development, enhancement, maintenance, protection and exploitation of intangibles (DEMPE) functions and business alignment.
“The need to align tax and the business models is critical — tax authorities are already questioning and seeking to understand the alignment as a starting point of inquiries, audits or from proactive discussions.”
“It’s not only just so many changes to the rules,” says van den Brekel, “but companies should also be taking a look at the impacts from all the advances in technology.” Closer integration, says van den Brekel, “presents an opportunity to not only make better core strategic choices, but also to streamline operations.”
Update policies, procedures and processes
Another key priority for nearly a third of businesses, 32%, will be taking a fresh look at fundamental, day-to-day procedures.
Again, companies will not only be seeking to align policies, procedures and processes to a wide range of new realities; they will also be seeking to automate, streamline and, wherever possible, improve efficiency and accuracy, and optimize information for decision-making.
So how should businesses respond?
- Reassess and define their core transfer pricing strategy. Recognize that — in an era of country-by-country (CbC) reports, master files and information sharing and generally greater transparency — tax authorities will no longer rely on local assessments only. Consequently, companies must make absolutely certain that their strategies, policies, practices and actual transfer prices are clear, consistently applied and can stand up to intensive scrutiny.
- Align strategies and documentation with base erosion and profit shifting (BEPS) principles. As anti-BEPS principles take ever-firmer hold, companies will need to update their business structures and ultimately their transfer pricing framework and documentation. Failure to do so will increase the likelihood and cost of controversy and potential damage to reputation.
- Assess and prioritize your needs. Take the time to assess your needs and where risks might arise, how you are placed to effectively respond to them and develop steps to narrow the gaps.
- Re-evaluate resources. Do you have the skills, abilities and resources necessary to accomplish everything associated with heightened transparency, BEPS and an overall likelihood of accelerating controversy? Most organizations are by no means adequately equipped to address the needed workflows and specializations required.
- Harness automation. One means of addressing the resource shortfall is embracing technology. Leading companies are able to automate many of today’s manual processes, freeing resources for the wide range of tasks (often strategic or value adding) on the tax department “to-do” list.
- Be proactive. Once strategies are formed, policies implemented and processes put in place, companies will be in a better position to assess their greatest tax risks. Where possible, consider such steps as looking for an advanced ruling or negotiating an advance pricing agreement.
Read more: Operationalizing global transfer pricing