International taxation is undergoing the biggest shake-up for a generation. The already complex world of transfer pricing is at the front and centre of these disruptive changes, both in the rules that govern it and in the heightened scrutiny it now faces.
The chief driver of change is the global roll-out of the OECD's Base Erosion and Profit Shifting (BEPS) Action Plan. More than a hundred countries have pledged to implement at least some of the Action Plan elements.
As part of the global tax reforms, your business needs to demonstrate that transfer pricing reflects the economic substance of value creation and exchange. Substance can appear quite straightforward in areas such as manufacturing, where it's obvious that a factory or warehouse exists. However, what we refer to here are the 'significant people functions' – where are the people controlling the important risks in the business, such as new product development, or procurement. Where substance gets even more complex, and makes transfer pricing all the more complicated, is in areas such as the creation and development of intellectual property and other intangible assets. Key questions include: does transfer pricing within your organisation reflect the substance of where and how value is created and exchanged?
By re-aligning taxation with economic substance, the BEPS Action Plan is meant to reduce the risk of double taxation. But this depends on how the rules are implemented and enforced in different jurisdictions. Given how much is open to interpretation, the risk of compliance lapses, disputes and double taxation could increase.
Many countries believe that they should be entitled to more tax revenue as a result of the BEPS Action Plan, which will almost certainly lead to an increase in inter-jurisdiction disputes as authorities vie over the taxing rights. The resulting questions include: ‘How can you justify your transfer pricing approach?’ It is also important to identify transactions that tax authorities could focus on as a basis for transfer pricing audit and additional tax demands.
Under the documentation spotlight
The risk of tax authority challenge is heightened by the increased levels of transfer pricing documentation and disclosure. This includes the transaction-level detail within the local file, which provides authorities with a revealing blueprint of profit drivers, intercompany financing and pricing policies within your business. The spotlight is intensified still further by requirements such as the breakdown of the intangible (DEMPE) lifecycle within the master file. As a result of country by country (CbC) reporting, authorities also have the opportunity to compare data such as the size of the workforce against the share of the tax take in each of your operating territories. Many tax authorities are using the CbC reporting to search for possible shortfalls in the tax being paid to them.
Splintering rules as a result of BEPS
The third main challenge within this new transfer pricing landscape is the selectivity and varied speed at which BEPS recommendations are introduced within different jurisdictions. In some cases, local legislation goes beyond the requirements and guidance within the BEPS Action Plan. The resulting inconsistencies are creating a complex patchwork of local rules. Some countries are applying high penalties for missing locally-set deadlines for notifications. This approach is considered by many to be against the spirit of the BEPS project (which was intended to improve coherence and consistency as well as transparency) and it can look very like an attempt to raise revenues.
Navigating through disruption and change
The 2018 edition of the annual Grant Thornton global transfer pricing guide provides invaluable information to help you steer through these difficult waters.
The guide includes a jurisdiction-by-jurisdiction overview of transfer pricing rules in place, how these are likely to be affected by BEPS and when changes are likely to be introduced. As you will see, developments are coming in fast and changes since our 2015/16 edition are considerable.
If you would like further information and guidance geared to your particular business, please feel free to get in touch with our Transfer pricing advisors.
Our specialist teams can help with:
- Audit support – sophisticated economic arguments, research and databases can help defend transfer pricing policies before the tax authorities
- Documentation – using expert local knowledge to prepare country-specific documentation to satisfy local tax regulations
- Planning – the growth or restructuring of a company doing business internationally provides an opportunity to review transfer pricing and tax planning to minimise tax burden
- Supply chain re-engineering – the critical analysis of the supply chain to gain operational efficiencies.