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Ernst And Young Publishes Transfer Pricing Survey

by Jason Gorringe,, London

27 December 2007

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.

The full text of the Ernst & Young Global Transfer Pricing Survey can be found in the Tax News Resources section.

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