The transfer pricing (TP) ocean continues to be turbulent. The winds of regulatory change, geopolitical risks, disruptive technology, fiscal pressures combine to create a challenging storm.
The 2024 EY International Tax and Transfer Pricing Survey of 1,000 TP professionals shows an overwhelming majority of respondents concerned about double taxation risks arising out of the Organisation for Economic Co-operation and Development (OECD) Inclusive Framework on Base Erosion and Profit Shifting (BEPS) project, which introduces a new global minimum tax of at least 15% for multinational enterprises.
Respondents to the 2023 EY Tax Risk and Controversy Survey say they anticipate the number and intensity of audits to grow by 79% in the next two years compared with the previous two. TP was again identified as the top area for risk, as 53% of respondents say they expect tax authorities to focus more on cross-border tax issues in the coming years.
Certainty, therefore, assumes even greater importance. This is evidenced by a surge in levels of interest in advance pricing agreements (APAs) and dispute resolution programs offered by tax administrations.
In today’s world, tax authorities have access to greater amounts of taxpayer information. This data amplified with the power of artificial intelligence, related technology and analytics enables more sophisticated and detailed audits requiring taxpayers to be better prepared. Poor data quality and ineffective use of technology was identified by survey respondents to be their two biggest challenges.
Survey respondents also identified the importance of TP in business decisions regarding supply chains, inflation, environment, sustainability and governance (ESG) aspects making it more broad-based than simply compliance.
How do taxpayers address these areas? Companies need to go back to a new "A B C D" to navigate safely. These new ABCDs are:
Alignment
The TP function within companies has to be integrated with the rest of the business, engage with key stakeholders and be involved in policy decisions early. Tax and commercial considerations need to be aligned before implementation to avoid friction and costly disputes later. Geopolitics and ESG objectives are increasingly shaping business decisions. The TP policy has to carefully reflect these considerations especially on people-based substance and appropriate profit sharing among jurisdictions.
BEPS
More countries will legislate local implementation rules on global minimum tax. India is expected to do so in the full union finance budget later in the year. Companies have to understand these rules, their own data, assess gaps if any and put in place remediation plans. Companies also have to be prepared for double taxation risks and determine options to either avoid controversy or exit it early.
Certainty
Tax controversy is expensive and time-consuming for businesses. They also carry reputational risks if matters become high profile and are reported in the media. Taxpayers are likely to face more intensive audits in future. Companies have to consciously explore all options of dispute resolution and management like litigation, Advance Pricing Agreements, Mutual Agreement Procedure (MAP), Safe Harbours and settlements.
Having a strategy that combines one or more of these options is necessary and prudent. The Indian APA program has been a success story over its decade of operation. It has helped many companies achieve certainty on their intercompany pricing and freedom from regular TP audits.
Data
Standard transfer pricing data is the key to robust and predictable Pillar Two calculations. It is also critical for managing tax authority challenges in audits. The transition into both a tax environment in which the minimum taxes described in Pillar Two, as well as a more transparent world related to public disclosures of the Country-by-Country Reports, are compelling corporations to attempt standardising their internal data.
Tax authorities are going beyond routine information in the transfer pricing documentation prepared by companies and keenly analyse public filings, social media profiles and posts, job profiles, news articles to connect the dots. Hence, understanding the company’s business and data holistically and putting in place a coherent narrative is critical. Harnessing technology to help automate data input, monitoring gathering, analysis and insights will help optimise human effort and reduce risks.
Transfer Pricing cannot be a check the box compliance. It has wider ramifications for business. The traditional siloed approach is outdated. Changes in the external environment necessitate fresh thinking. Companies should focus on understanding new rules and assessing its impact on business.
Producing, collecting and analysing relevant data using technology will enable informed decision making and risk identification. Aligning TP and tax policies with the organisation’s broader public face will help establish a credible and coherent story while engaging with tax authorities. Getting certainty through an initiative-taking approach for current and anticipated controversy can save precious time, administrative and monetary resources.
It is essential to draw a clear roadmap to achieve these objectives. Does your company have it?
—The author, Ashwin Vishwanathan, is a Tax Partner with EY India. The views expressed are personal.
The 2024 EY International Tax and Transfer Pricing Survey of 1,000 TP professionals shows an overwhelming majority of respondents concerned about double taxation risks arising out of the Organisation for Economic Co-operation and Development (OECD) Inclusive Framework on Base Erosion and Profit Shifting (BEPS) project, which introduces a new global minimum tax of at least 15% for multinational enterprises.
Respondents to the 2023 EY Tax Risk and Controversy Survey say they anticipate the number and intensity of audits to grow by 79% in the next two years compared with the previous two. TP was again identified as the top area for risk, as 53% of respondents say they expect tax authorities to focus more on cross-border tax issues in the coming years.
Certainty, therefore, assumes even greater importance. This is evidenced by a surge in levels of interest in advance pricing agreements (APAs) and dispute resolution programs offered by tax administrations.
In today’s world, tax authorities have access to greater amounts of taxpayer information. This data amplified with the power of artificial intelligence, related technology and analytics enables more sophisticated and detailed audits requiring taxpayers to be better prepared. Poor data quality and ineffective use of technology was identified by survey respondents to be their two biggest challenges.
Survey respondents also identified the importance of TP in business decisions regarding supply chains, inflation, environment, sustainability and governance (ESG) aspects making it more broad-based than simply compliance.
How do taxpayers address these areas? Companies need to go back to a new "A B C D" to navigate safely. These new ABCDs are:
Alignment
The TP function within companies has to be integrated with the rest of the business, engage with key stakeholders and be involved in policy decisions early. Tax and commercial considerations need to be aligned before implementation to avoid friction and costly disputes later. Geopolitics and ESG objectives are increasingly shaping business decisions. The TP policy has to carefully reflect these considerations especially on people-based substance and appropriate profit sharing among jurisdictions.
BEPS
More countries will legislate local implementation rules on global minimum tax. India is expected to do so in the full union finance budget later in the year. Companies have to understand these rules, their own data, assess gaps if any and put in place remediation plans. Companies also have to be prepared for double taxation risks and determine options to either avoid controversy or exit it early.
Certainty
Tax controversy is expensive and time-consuming for businesses. They also carry reputational risks if matters become high profile and are reported in the media. Taxpayers are likely to face more intensive audits in future. Companies have to consciously explore all options of dispute resolution and management like litigation, Advance Pricing Agreements, Mutual Agreement Procedure (MAP), Safe Harbours and settlements.
Having a strategy that combines one or more of these options is necessary and prudent. The Indian APA program has been a success story over its decade of operation. It has helped many companies achieve certainty on their intercompany pricing and freedom from regular TP audits.
Data
Standard transfer pricing data is the key to robust and predictable Pillar Two calculations. It is also critical for managing tax authority challenges in audits. The transition into both a tax environment in which the minimum taxes described in Pillar Two, as well as a more transparent world related to public disclosures of the Country-by-Country Reports, are compelling corporations to attempt standardising their internal data.
Tax authorities are going beyond routine information in the transfer pricing documentation prepared by companies and keenly analyse public filings, social media profiles and posts, job profiles, news articles to connect the dots. Hence, understanding the company’s business and data holistically and putting in place a coherent narrative is critical. Harnessing technology to help automate data input, monitoring gathering, analysis and insights will help optimise human effort and reduce risks.
Transfer Pricing cannot be a check the box compliance. It has wider ramifications for business. The traditional siloed approach is outdated. Changes in the external environment necessitate fresh thinking. Companies should focus on understanding new rules and assessing its impact on business.
Producing, collecting and analysing relevant data using technology will enable informed decision making and risk identification. Aligning TP and tax policies with the organisation’s broader public face will help establish a credible and coherent story while engaging with tax authorities. Getting certainty through an initiative-taking approach for current and anticipated controversy can save precious time, administrative and monetary resources.
It is essential to draw a clear roadmap to achieve these objectives. Does your company have it?
—The author, Ashwin Vishwanathan, is a Tax Partner with EY India. The views expressed are personal.
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