Trans­fer pric­ing still a headache

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - CHAR­LOTTE RUSH­TON

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.

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