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E&Y Survey Identifies Transfer Pricing As Significant And Growing Global Tax Risk

by Robert Lee,, London

19 August 2005

Transfer pricing is becoming central to the management of tax risk in the financial services industry, according to research published today by professional services firm Ernst & Young.

The survey, entitled 'Transfer Pricing Organisations, Audits and Priorities in the Financial Services Industry' was carried out in May and June 2005. It involved 108 financial institutions from a wide range of countries including Australia, Canada, several from Continental Europe, Hong Kong, Japan, Singapore, South Africa, the United Kingdom and the United States.

It showed that transfer pricing risk is a global phenomenon, with 28 countries cited by the survey respondents as likely to challenge their transfer pricing arrangements during the next two years. More than 80 per cent of financial services firms felt that there was a greater than 60 per cent risk of a challenge to their transfer pricing policies by the tax authorities in the next two years. Consequently, more than half of these firms set aside a provision for transfer pricing risk in their financial statements.

At present, 52 per cent have global transfer pricing policy guidelines, but only 17 per cent prepare the documentation required by tax rules in a globally coordinated manner, and 56 per cent perform economic analyses to demonstrate to tax authorities that their pricing is consistent with the tax standards. As a result, 36 per cent of the respondents expect to increase their in-house transfer pricing resources in 2006.

“Transfer pricing is a critical tax area for financial services companies,” observed Claire Acard, Ernst & Young's Global Financial Services Transfer Pricing leader.

“Tax authorities around the world have been stepping up their efforts to enforce these rules, as it gives them a way to increase tax revenues without raising headline tax rates," she added.

In other key findings, the survey revealed that:

  • More than 80 per cent of respondents planned to devote more effort to managing transfer pricing issues in 2006 than 2005;
  • Just under 60 per cent of respondents dedicate between one to three people to managing their company’s transfer pricing activity, while nearly a third have less than one person involved;
  • Areas of transfer pricing requiring the greatest focus to manage more effectively include head office services (70 per cent of respondents); information technology costs (61 per cent); and inter-company debt and guarantees (45 per cent);
  • The UK, US and Japan top the list of countries that have audited the participating companies’ transfer pricing policies since 2000, followed by France, Germany and Australia; and
  • Looking forward, the research shows that the UK is anticipated to be the most active tax authority, with 68 per cent of the respondents expecting transfer pricing challenges from that market in the next two years, followed by the US, Japan, France, Germany, South Korea, India, Canada and Australia.

“The industry expects the levels of transfer pricing risk to increase in the next few years," Ms Acard continued.

"In today’s environment, Tax Directors and CFOs have the increased responsibility of anticipating and effectively managing potential tax risks that, if left unchecked, could compromise the integrity of financial statements and lead to significant costs resulting from double taxation, interest, penalties and, importantly, the costs of management time required to respond to the challenges,” she warned.

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