Transfer pricing climbs the corporate agenda
 |
8 Ianuarie 2010 |
 |
ERNST & YOUNG S.R.L. |
Adresa
Strada Dr. Felix Iacob, Nr. 63-69
Cladirea Premium Plaza, Etaj 15
011033 Bucuresti, Sector 1
Telefon
+40-21-402.40.00
Fax
+40-21-310.71.93
Website
www.ey.com
Disputes over transfer pricing between tax authorities from different countries are set to rise, leading to undesirable double taxation for multinational companies with enormous amounts at stake.
By means of transfer pricing – the prices at which companies belonging to the same multinational invoice each other – multinationals determine in essence where they create value and how much tax each country concerned is entitled to. Tax authorities therefore regularly check that these internal pricing arrangements are appropriate.
Tax authorities are turning their attention to transfer pricing to an increasing degree. A recent survey conducted by Ernst & Young in 49 countries paints a clear picture: tax authorities are assigning more staff to take a closer look at transfer pricing.
Furthermore, since Ernst & Young's last TP survey of tax authorities in 2006, more than 10 additional jurisdictions have introduced new requirements for tax payers to create and maintain transfer pricing documentation arrangements, with China, Slovakia and Greece the three most recent.
This is a logical outcome. In view of growing tax revenue shortfalls, tax authorities are keen to take a larger slice of the tax pie. However, this will also result in more international disputes between tax authorities. Should they be unable to reach consensus, they can determine the amount of taxable value that is created in their country unilaterally. As a result, the multinational will bear a twofold tax burden.
Huge amounts are at stake. In 2006, one of the world's leading pharmaceuticals paid USD 3.1b to settle a high profile dispute with the Internal Revenue Service in the US. The IRS had found that the company had allocated too much of the value created from a drug sold in the US to the UK and too little to the US in the period from 1989 to 2005. HM Revenue and Customs (HMRC) in the UK found that it had not. The two authorities could not reconcile their differences and the pharmaceutical company suffered the consequences.
The OECD has guidelines on transfer pricing. Their central tenet is the arm's length principle, i.e., the internal price must correspond to the external price at which third parties would invoice each other. However, theory and practice diverge. At times, it is difficult to find a comparable external transaction. Indeed, often it is an intangible value that is created, e.g., through a marketing campaign.
Transfer pricing is also a controversial issue when it comes to business closure. If a company relocates production from [insert your country's name] to China, the plant in China makes use of the know how developed in [insert your country's name]. What is the value of this know how which the [insert your country's name] location has in effect sold to the Chinese? Do the Chinese tax authorities recognize this amount as a cost item?
Disputes over transfer pricing between tax authorities from different countries are set to rise, leading to undesirable double taxation for multinational companies with enormous amounts at stake.
By means of transfer pricing – the prices at which companies belonging to the same multinational invoice each other – multinationals determine in essence where they create value and how much tax each country concerned is entitled to. Tax authorities therefore regularly check that these internal pricing arrangements are appropriate.
Tax authorities are turning their attention to transfer pricing to an increasing degree. A recent survey conducted by Ernst & Young in 49 countries paints a clear picture: tax authorities are assigning more staff to take a closer look at transfer pricing.
Furthermore, since Ernst & Young’s last TP survey of tax authorities in 2006, more than 10 additional jurisdictions have introduced new requirements for tax payers to create and maintain transfer pricing documentation arrangements, with China, Slovakia and Greece the three most recent.
This is a logical outcome. In view of growing tax revenue shortfalls, tax authorities are keen to take a larger slice of the tax pie. However, this will also result in more international disputes between tax authorities. Should they be unable to reach consensus, they can determine the amount of taxable value that is created in their country unilaterally. As a result, the multinational will bear a twofold tax burden.
Huge amounts are at stake. In 2006, one of the world’s leading pharmaceuticals paid USD 3.1b to settle a high profile dispute with the Internal Revenue Service in the US. The IRS had found that the company had allocated too much of the value created from a drug sold in the US to the UK and too little to the US in the period from 1989 to 2005. HM Revenue and Customs (HMRC) in the UK found that it had not. The two authorities could not reconcile their differences and the pharmaceutical company suffered the consequences.
The OECD has guidelines on transfer pricing. Their central tenet is the arm’s length principle, i.e., the internal price must correspond to the external price at which third parties would invoice each other. However, theory and practice diverge. At times, it is difficult to find a comparable external transaction. Indeed, often it is an intangible value that is created, e.g., through a marketing campaign.
Transfer pricing is also a controversial issue when it comes to business closure. If a company relocates production from [insert your country’s name] to China, the plant in China makes use of the know how developed in [insert your country’s name]. What is the value of this know how which the [insert your country’s name] location has in effect sold to the Chinese? Do the Chinese tax authorities recognize this amount as a cost item?
