#Transfer pricing tax update
#Transfer pricing tax full

If choosing an area of focus to uncover high-risk transfer pricing issues, it would be on the multinational’s operating model and how the transfer pricing policies being applied in practice align with this. If not, they can build up significantly over time, leading to material tax exposures at the time of completing the deal. It is prudent to see that these risks are managed appropriately by involving transfer pricing specialists as and when they arise and well in advance of the deal.

Lack of transfer pricing documentation (Master file / Local file) or even transfer pricing benchmarking.

Inconsistencies between the legal agreements and transfer pricing policies (or even a lack of agreements themselves).

Weak transfer pricing control environment, with little focus on transfer pricing from the head of tax or CFO.Open transfer pricing disputes with tax authorities and / or material transfer pricing provisions.Financials of legal entities not aligning with transfer pricing policies.Insufficient / no appropriate attribution of profit to permanent establishments.High interest rates / quantum of related-party debt.Historical business restructurings undertaken without any consideration for exit charges / post restructuring transfer pricing policies.Higher risk transactions, e.g., R&D services remunerated on a cost-plus basis / procurement hubs remunerated through a gain share.Centralised transfer pricing models not supported by an appropriate level of people substance.Mismatches between legal ownership of intellectual property (IP) and the location where important risk control decisions are made in relation to that IP (so called “DEMPE risk control functions”).There are several high-risk transfer pricing issues that typically are identified during a deal, including: Additionally, a lack of contemporaneous documentation usually leads to skepticism by a tax authority on the robustness of a multinational group’s transfer pricing affairs, and the increased risk of scrutiny.Īs such, it has never been more important, and challenging, to effectively manage transfer pricing risk. In some countries, there can be significant penalties for failing to prepare or file transfer pricing documentation.

#Transfer pricing tax full

This could lead to tax adjustments on the interest rate, quantum of debt, or more fundamental questions on whether the debt would have been issued in the first place and is more akin to equity (leading to potential full denial of corporate tax deductions and / or withholding tax leakages).įinally, the compliance burden has increased significantly with the introduction of country-by-country reporting, Master files and Local files (“three tier transfer pricing documentation”).

This guidance is still being digested but does open the door for tax authorities to challenge in the future on legacy related-party financing.

#Transfer pricing tax update

Getting double tax relief through mutual agreement procedures can be a burdensome, expensive and lengthy process and does not always guarantee to have the desired outcome.Īdditionally, new guidance was released by the OECD in 2020 on transfer pricing and financial transactions, with an important update being an increased focus on the lender’s perspective (i.e., substance of the lender and options realistically available to them). For example, tax authorities may have differing views on what constitutes “substance,” leading to direct challenges on the transfer pricing policies. This has led to an increase in cross-border disputes and challenges for companies. While these have now been implemented in many countries, tax authorities have taken different approaches to interpreting them. The OECD base erosion and profit shifting (BEPS) project led to a wave of new substance-based transfer pricing rules and reporting requirements, as well as new focus on interest deductibility (among others). The international tax landscape has changed significantly in the last 10 years.