According to the results of a survey published earlier this month by accounting
firm, Ernst & Young, 87% of multinational enterprises (MNEs) believe that
transfer pricing is a risk when managing their financial statements, as compliance
requirements have increased due to developments in financial reporting.
Commenting on the publication of the biennial "Global Transfer Pricing
Survey", John Hobster, Ernst & Young’s Global Accounts Leader,
Transfer Pricing, explained that:
“Risk mitigation is a key priority for MNEs, and transfer pricing has
increasingly moved into board rooms and audit committees. As convergence of
customs and tax authorities continues, tax authorities collaborate more and
more across borders, and new regulations come into place, MNEs want to ensure
that transfer pricing is compliant with tax laws.”
The degree of perceived transfer pricing-related financial-statement risk varied
significantly by industry, reflecting the inherent complexity of the underlying
transfer pricing issues of those industries, according to Ernst & Young.
In particular, 53% of parent company respondents in telecommunications, 48%
in pharmaceuticals, and 45% in the biotechnology industry reported that transfer
pricing posed the largest financial risk they face.
“Companies need to manage their financial risks with greater precision,
as enhanced transfer pricing documentation requirements have intensified the
responsibilities of MNEs to actively report and justify the impact of their
tax position. This is particularly tough at a time when there is a greater chance
that transfer pricing policies and practices will be audited,” Hobster
continued.
Over half of the survey respondents (53%) said that their transfer pricing
compliance costs had increased. This was a significant increase on the 2005
survey results, where only 29% of parent companies mentioned a rise in costs
as a result of financial reporting and regulatory developments.
The poll of 850 MNEs across 24 countries, found that convergence of customs
and tax authorities in many countries had increased the complexity of transfer
pricing compliance. However, the survey showed that only half of the MNEs coordinated
their internal customs and transfer pricing systems post transaction.
“This is surprising, as a third of the respondents from parent MNEs say
that during a transfer pricing audit they have been aware of exchange of information
between tax and customs authorities,” observed Hobster, continuing:
“The lack of MNEs’ internal customs and tax coordination has increased
since our 2005 survey. This is concerning and probably a result of general lack
of appreciation of how customs and tax offices work together, domestically and
internationally. We would therefore welcome increased supranational dialogue
and discussion about this difficult area.”
The survey further showed that 19% of parent respondents have had their customs
valuations challenged where they have been based on their transfer prices for
the same goods, or vice versa. In 44% of these cases, increased customs valuations
(and costs) have not resulted in corresponding adjustments (and credits) to
corporate income taxes.
Transfer pricing was found to be the single most important issue for 76% of
parent respondents in the pharmaceutical sector, which was an increase of 19%
on the 2005 survey.
Pharmaceutical companies are nearly twice as likely as companies in any other
industry to experience an adjustment of transfer prices, and parent respondents
in the pharmaceutical sector said that 56% of transfer pricing examinations
since 2003 resulted in adjustments.
Other sectors where transfer pricing is of key importance included: the automotive,
biotechnology, consumer products and telecommunications sectors.
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