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New Report Reveals Transfer Pricing Trends

by Robert Lee,, London

31 August 2012

Japan, Canada, India, Germany and the UK have the highest number of pending transfer pricing reviews, according to a new survey from Ernst & Young which tracks key global trends.

Ernst & Young's Transfer Pricing survey 2012 covers 50 jurisdictions. According to the report, since the survey began in 1995, there has been a remarkable increase in the number of countries introducing transfer pricing requirements. These requirements are increasingly being implemented not only in developed, but developing markets, and in Africa, Asia and Eastern Europe in particular.

Perhaps with this ever increasing spread in mind, Ernst & Young found that tax authorities continue to increase their transfer pricing staffing. Nearly all jurisdictions have plans for further increases. The increasing geographic scope of documentation requirements is however imposing increasing benchmarking burdens. This is particularly problematic for companies where public reporting of company financial data is limited or non-existent in certain countries. In addition, the survey found that there still exists little co-ordination of transfer pricing and indirect tax standards. The key exceptions are Estonia, Latvia, Peru, Portugal and Venezuela.

On top of this, penalties were found to have become more frequent and more onerous. The survey found the particular danger areas to be Argentina, Brazil, China, Colombia, Ecuador, Finland, Hungary, Indonesia, Italy, Kazakhstan, Malaysia, Mexico and Venezuela. This is either because of their high penalty rates or their willingness to impose penalties, or both. The report stresses that even when penalties are not imposed, the risk of double taxation makes proper transfer pricing documentation important. At present, a mutual agreement procedure (MAP) remains the predominant means of resolving transfer pricing disputes. Nearly all jurisdictions report that MAP claims are ultimately resolved without double taxation.

The report is not all bleak reading, however. Ernst & Young found that the availability of advance pricing agreements (APAs) continues to expand, providing a potentially effective means to manage transfer pricing risk. However, processing times remain long, particularly in the case of the US and Canada. In addition, the report argues that while the documentation burden is growing, taxpayers can take heart in the fact that a broad consensus exists with respect to the arm’s-length principle and its application. The survey found that method selection has become more flexible, with an almost universal acceptance of net profit-based methods.

Three main recommendations are made by Ernst & Young. In the first instance, taxpayers are urged to recognize that they need more resources with increased geographic reach and some non-traditional skills. Companies are recommended to pursue tax certainty and evaluate APAs and rulings more than ever. This will help them better manage the growing geographic footprint of transfer pricing requirements, as well as the additional risk of adjustments and penalties. Finally, the report stresses that companies should continue to adopt new approaches to consistent global documentation and benchmarking to remain efficient and cost-effective when preparing transfer pricing documentation.

TAGS: tax | business | Hungary | India | Portugal | Venezuela | law | China | Colombia | Ecuador | Estonia | Latvia | Mexico | United Kingdom | group taxation | agreements | multinationals | controlled foreign corporations (CFC) | transfer pricing | Brazil | Canada | Finland | Germany | Indonesia | Italy | Kazakhstan | Malaysia | Peru | United States | standards | penalties | Argentina | Japan

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