KPMG: Transfer Pricing Systems 'Under Stress'

by Leroy Baker, Tax-News.com, New York

13 November 2009

A new KPMG report, "Planning for the Recovery – Examining Transfer Pricing in the Current Environment and Beyond," concludes that many transfer pricing systems are coming under unprecedented stress as companies and revenue authorities around the world reassess their economic expectations in the current environment and plan for a global recovery.

A key challenge affecting transfer pricing policies has been the lack of comparable transactions to act as benchmarks for intra-group commerce, as economic activity around the world has slowed, says the report. The report, assembled in articles by KPMG partners and transfer pricing professionals, deals with such issues as the implications of the economic downturn and recovery for common inter-company structures, the defense of transfer pricing arrangements in the recession, and the ability of taxpayers to mitigate issues with existing advance pricing arrangements.

Tax authorities, under pressure to provide revenue to their governments, are demanding additional documentation from formerly profitable companies that are now incurring losses and, therefore, paying less tax. "The economic events of 2008 and 2009 have dramatically tested the entire transfer pricing system, a system that has been developed over a period of increasing globalization and prosperity," said Steven Fortier, global leader of KPMG's Global Transfer Pricing Services group.

"The problem has been felt acutely in the area of third-party benchmarks," said Fortier. "Certain companies that may have been used historically as benchmarks may have been acquired or gone bankrupt during the recession, which would reduce the pool of benchmarks and potentially lead to 'survivor bias' in the financial results."

Advanced pricing agreements (APAs), often considered clear solutions to transfer pricing issues, have also come under strain, according to the report. APAs are binding contractual agreements, the terms of which are fixed while the agreement is in force. This means that companies wanting to change agreements because of market changes, falling prices or revenue losses, may find it difficult to adjust or terminate APAs that no longer match business realities.

"Taxpayers should expect an aggressive approach to their transfer pricing if they do not comply with an executed APA," Fortier said. "That said, understanding the relevant tax authority's views on APAs is important for companies in, or expecting to enter, an APA in the current environment."

The full report, prepared to meet the needs of tax and corporate finance executives, is available on KPMG's website.

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