Transfer pricing still a headache
TRANSFER pricing was a hot topic in 2013 and will continue to be as it remains on the agenda for the media, and is one of the most important taxation issues for multinational corporations. Around the globe, tax authorities have become more aggressive, primarily in order to reduce government fiscal deficits. The transfer pricing practices of a number of companies have been challenged, as tax authorities look to corporate taxes to help buoy revenue.
As tax authorities introduce new rules and require corporations to provide detailed documentation to defend their policies, multinationals must be certain they meet the requirements of the arm’s length standard — and provide the documentation to prove it. Appropriate comparables are one of the biggest issues in this documentation process.
The Africa Progress Report 2013 references research by Global Financial Integrity that estimates Africa lost as much as S$38bn between 2008 and 2010 to transfer pricing.
The OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations establish the “arm’s length principle” as the benchmark for good practice. This requires that all transactions within a company be conducted on the same terms that would apply if they were carried out between unrelated companies. In practice, the application of this principle is often very difficult as tax authorities often have limited access to information on intra-company transactions.
Most of the public company data comes from the US, UK, Germany, Australia and a handful of other regions. This leaves the rest of the world — including difficult tax regions such as Africa — in rather a dark spot when it comes to the availability of local data, if only public comparables data is being considered. Without a set of local or regional comparables to work from, multinationals run the risk of penalties, double taxation and other audit issues that could cost time and money. A good comparables set is critical to achieving the highest level of practical comparability — and therefore having a solid case in any litigation or audit.
Intercompany royalties offer another potential transfer pricing minefield. In situations where an African affiliate manufactures products using intangible assets owned by its foreign-based multinational, the issue of what represents an arm’s length royalty exists.
When it comes to natural resource transfer pricing, the key issue for African affiliates of natural resource multinationals is whether the foreign-based multinational has paid the African mining or oil affiliate an arm’s length price. The bottom line for multinational companies is that tax disclosure requirements in Africa are set to become more onerous and that a proper transfer pricing policy needs to be in place to prevent the imposition of penalties.
This task is compounded by the fact that the tactical implementation of transfer pricing policies already poses challenges for multinational organisations with regards to data, as one example, is often scattered across the globe, owned by various groups or housed in several enterprise resource planning systems, making reporting and quality control arduous.
Fortunately, multinationals now have access to tools to proactively manage the process, avoid risk and maximise efficiencies thanks to the availability of technology that can help manage the operational transfer pricing process.
That means that all varieties of data can be collected, validated and standardised in a centralised system, allowing for consistent and detailed reporting throughout the year. This enables corporate tax professionals to identify and communicate areas of risk and drive results throughout the year.