The Transfer Pricing Melting Pot

Transfer pricing application differs widely across East and West, causing uncertainty around what the future will hold for multinationals. Practical steps to retain flexibility and ensure efficient tax administration for both taxpayers and revenue authorities were discussed today at the Taxand global conference 2014 hosted by Taxand China in Shanghai.

Frédéric Donnedieu de Vabres, Chairman of Taxand, the world’s largest global organisation of tax advisors to multinational businesses, provides an overview of the session presented by members of Taxand’s global transfer pricing team, Antoine Glaize, Taxand France; Sanjiv Malhotra, Taxand India; Andrey Tereschenko, Taxand Russia and Marc Alms, Taxand USA:

“The disparity between interpretation and enforcement of transfer pricing standards across East and West remains a significant source of multi-jurisdictional disputes, as global bodies and individual countries adapt and evolve the rules. This dichotomy creates an uncertain environment as well as a compliance burden for multinationals navigating the melting pot of transfer pricing standards across the world.

“In 2010 The OECD developed its Transfer Pricing Guidelines to clarify the application of the arm’s length principle to eliminate the artificial movement of taxable profits by multinationals. Whilst this provided a solid framework for companies operating within member countries, it did little to clarify the principles for developing nations, or those that are not within the OECD, such as Brazil and India. In response, the UN developed a practical manual as guidance to help.

“Whilst multinationals in developing countries benefit from a simplified approach suggested by the UN, there is a real danger that the two approaches create a disjointed, twin-track system with differing rules which are hard to align. It is likely to take years for developing countries’ processes to harmonise with developed nations, who began adopting transfer pricing principles four decades ago. With a number of organisations involved, we must question whether a common definition for the arm’s length principle will be agreed and if a vision of future alignment is unrealistic.

“Transfer pricing has become the most controversial aspect of multinational tax strategies. In the West, multinationals are under pressure to contribute what the public view is their ‘fair share’ of taxes. Transfer pricing is seen as the key tool used in tax avoidance as tax authorities scrutinise alleged shifting of profits to low tax countries. Scrutiny will continue to increase with the changing requirements on multinationals to disclose ever more, potentially sensitive information of their business operations, with country by country documentations and the rise of tax information exchange agreements (TIEAs). However with this increase in data comes greater potential reputational risk should it to fall into the wrong hands.

“Who will be the leading voice by 2020 remains an unanswered question, although it’s most likely to be led at a national level. Now’s the time to analyse transfer pricing strategies and review operations to effectively prepare for tax audits. It has never been more crucial to have a robust transfer pricing policy in place and a prepared defence should it be scrutinised by tax authorities. Transfer pricing policy is evolving so fast that documentation cannot be static – indeed, in BRICS countries, transfer pricingP documentation is increasing at a phenomenal rate. What is clear is that a ‘one size fits all’ approach is not appropriate and the East remains fundamentally different to the West. Multinationals need to remain flexible and be ready to adapt to stay ahead of the curve. Change is coming for all multinational tax payers, the burden of proof are happening now.”