Transfer Pricing and The BEPS Initiative
In a growing culture of naming and shaming, global corporations such as Google and Starbucks have come under fire in the media for dodging their “fair” share of corporate taxes, and this has prompted a wider review of “aggressive” planning aimed at eroding the tax base or shifting profits to more favourable tax jurisdictions.
As a result, the Organisation for Economic Cooperation and Development (OECD) launched its Base Erosion and Profit Shifting (BEPS) initiative in 2013, which addresses the challenges arising from the application of international tax rules and includes a review of transfer pricing, intellectual property structures and permanent establishments.
One of the first deliverables of the BEPS project was the re-examination of transfer pricing documentation, and the OECD released a report in September 2014 containing revised standards, which when implemented, will see a significant increase in the compliance burden faced by companies within the transfer pricing regime.
Transfer pricing is the method used to determine the price at which connected parties transact with one another, be it cross-border transactions between two companies that are part of the same multinational group, or transactions between a company and a controlling individual where both parties are within the same jurisdiction.
The rules are designed to ensure that the taxable profits of connected parties are calculated as if transactions between them were carried out at the prices that would be charged between two entirely independent entities and cover not only the intragroup sale of goods and services, but all transactions including the right to use patents and trademarks and the provision of intragroup finance.
The new reporting standards will require multinational enterprises to provide tax administrations with high-level global information regarding their worldwide business operations and transfer pricing policies in a “master file”, and each country to keep a “local file” of transactional transfer pricing documentation that identifies relevant related party transactions, the amounts involved in those transactions, and the company’s analysis of the transfer pricing determinations they have made with regard to those transactions. Furthermore, a new ‘country-by-country’ reporting requirement is to be introduced, which will require multinationals to report annually, and for each tax jurisdiction in which they do business, extensive details of their income, taxes and business activities.
With the introduction of these new standards and a need for Governments to raise revenues, I suspect we may well see an increase in the number of transfer pricing enquiries by tax authorities, which without proper preparation, can be a gruelling and long drawn-out process for a business. Moreover, it is not uncommon for HMRC to only allow companies between 30 and 90 days to respond to an initial transfer pricing enquiry notice, which provides little time to compile supporting transfer pricing documentation if it is not already in place.
It is therefore now more important than ever to ensure that your company’s transfer pricing policies and documentation are robust and up to date. For more information or to discuss how Ensors can assist with this process, our corporate tax specialists are here to help.