Transfer Pricing Remains Tax Bugbear For Multinationals

by Robert Lee, Tax-News.com, London

04 December 2001

A new survey from Ernst & Young LLP has found that eighty-five percent of respondents from multinational firms still consider their most important international tax issue to be transfer pricing. The report states that most firms appear to be 'losing out on opportunities arising from proactive transfer pricing management of post merger integrations, e-commerce and intellectual property.'

E&Y explains: 'Fiscal authorities are policing multinationals' transfer pricing policies ever more aggressively in an attempt to protect their tax base from erosion. Multinationals are finding themselves increasingly under attack from all quarters. The risk of exposure to double taxation and possible interest and penalties mean that you can no longer afford to take a reactive approach.'

John Hobster, CEO of Global Transfer Pricing Services at E & Y, said: 'MNCs (multinational corporations) are missing opportunities to build shareholder value by not integrating transfer pricing up front in strategic business actions including mergers and acquisitions, divestments, e-commerce and intellectual property management. There are encouraging signs that the most progressive companies are beginning to understand how transfer pricing can impact every phase of their business operations.'

Transfer pricing refers to the cost of cross-border transactions between units of multinational companies including the inter-company transfer of goods, property, services, loans and leases. Only twenty-nine per cent of parent companies questioned told the 2001 Global Survey that they have included transfer pricing as part of their strategic corporate planning.

'Failing to integrate transfer pricing policies in the case of mergers and acquisitions is alarmingly common,' added Hobster. 'Half of all companies that reported a merger or acquisition in the last two years simply applied the dominant company’s transfer pricing methodology, and 23 percent allowed multiple systems to continue. This increases their risk of being taxed on the same profits twice, and falls short of 'best practice' behavior to harness the opportunities presented by such events.'

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