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 its transfer pricing is supported by appropriate value chain analysis. Where significant profits are allocated, it needs to be demonstrated that there is economic substance. of value creation and exchange. The term “substance,” in the context of transfer pricing, not only limits to tangible assets, but also extends to significant people functions (e.g where are the people controlling the important risks in the business, such as new product development, or procurement). The concept of “substance over form” is an increase focus by many tax authorities. Related party transactions that involve intellectual properties are also becoming an increasingly hot topic as the ownership of an intellectual property may no longer be sufficient to entitle a group entity to all the associated profits.
As multinationals, a key question that should be asked is “does my transfer pricing reflect the results of my value chain analysis?”
By re-aligning taxation with economic substance, the BEPS Action Plan is meant to reduce the risk of double non-taxation
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?’ Some types of transactions tax authorities are focusing more on include those that involve intellectual properties, high-value services, management services, intercompany financing, etc.
Under the documentation spotlight
The risk of tax authority challenge is heightened by the increased levels of transfer pricing documentation and disclosure. This includes additional details within the master file and local file which provide 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 taken in each of your operating territories. The additional information available to tax authorities increases transparency to them and could potentially increase the transfer pricing risks for many multinationals.
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 the local advisors listed in each of the jurisdiction pages or your local member firm.
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.