Strategizing International Tax Best Practices – by Keith Brockman

Click to access EY-2013-GTP-Survey.pdf

This very insightful, and timely, survey of senior tax professionals in 26 countries clearly portrays a significant increase in transfer pricing controversies and resulting double taxation.  The survey indicates that 66% of the respondents identified “risk management” as the highest transfer pricing priority.

Some challenges cited in the report include:

  • Governmental authorities expanding definitions of “aggressive tax planning”
  • Permanent Establishment (PE) assertions, including reliance on proposed changes to the commentary to Article 5 of the OECD Model Treaty
  • Reputational risks
  • Public perception
  • Increased transfer pricing complexity

Other findings include:

  1. 55% increase in Competent Authority cases from 2010
  2. 28% of the companies utilized Mutual Agreement Procedure (MAP)
  3. 26% of the companies entered into Advance Pricing Agreements (APAs)
  4. Master file documentation methodology may not be compliant in Africa, Asia and Latin America
  5. 41% expect intangibles to be the most important area in the next 2 years
  6. Intangible issues included assertion of uncompensated marketing intangibles and dispute over legal vs. beneficial ownership
  7. Over 75% of PE issues arose from frequent business travelers, seconded employees and providing services through employees or other personnel abroad (PE statistics on page 23)
  8. BRICs and Africa are #1 or #2 ranking in transfer pricing priority for 30% of such companies, although 75% of those companies have no full-time transfer pricing personnel located in those jurisdictions

The report concludes with detailed survey responses for each of the 26 countries, addressing the following topics:

  1. Importance of transfer pricing
  2. Audit and controversy experience
  3. Trends in transfer pricing approaches, topics and enforcement
  4. Operationalizing transfer pricing

Best Practice considerations presented for insight include:

  • Indirect taxes, including customs and VAT, should be an integral part of the transfer pricing process, notwithstanding different functional reporting
  • Attention to detail, via frequent reviews, for intercompany transactions should be  a recurring process to ensure substance matches the form cited in transfer pricing documentation
  • Review of current transfer pricing methodologies
  • Renewed focus on controversy and dispute resolution techniques, including MAP, APAs and arbitration
  • Reputational risk consideration

The survey provides a thoughtful perspective in addition to recently issued consultation documents by the OECD re: transfer pricing documentation and intangibles, as well as recent general anti-abuse rules (GAAR) drafted and/or legislated into law.

This survey is especially insightful when compared to prior posts re: OECD Revised Draft on Transfer Pricing Aspects of Intangibles (3 August), OECD White Paper on Transfer Pricing Documentation suggesting a Masterfile and Local file approach (31 July), UK Finance Act 2013: GAAR has arrived (21 July), OECD BEPS report and Action Plan (19 July), PwC PE survey: Trends & Challenges (14 July), OECD: A Framework for Co-operative Compliance (13 June), UN: Practical Manual on Transfer Pricing & Tax Training Initiatives (2 June), A new role: Head of tax controversy (3 May), Global Mobility & International Tax: Alignment for Best Practices (24 April), and  PE Risks & Best Practices for Awareness & Planning (14 April).

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