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2013 Global Transfer Pricing Survey

Navigating the choppy waters of international tax. Companies consider transfer pricing a question of risk management.

2013 Global Transfer Pricing Survey
Increased focus on risk management and improving transfer pricing skills in emerging markets are top priorities / Nearly half of the survey respondents experienced double taxation / Companies are strengthening efforts to comply but lack monitoring measures.

Transfer pricing continues to be a significant source of controversy between the world's tax authorities and multinational enterprises. Since the publication of EY's last transfer pricing survey in 2010, the pace of globalization has increased, and businesses have been working hard to adapt by better managing their cross-border activities. They are struggling to comply with unfamiliar and frequently changing tax and statutory requirements. At the same time, tax authorities worldwide have stepped up their enforcement, and they are paying special attention to transfer pricing.

Much of this growing focus on transfer pricing is driving an increasing amount of work by supranational organizations. This is evidenced by the current OECD project on BEPS (Base Erosion and Profit Shifting) that has intensified the activity of tax authorities to harmonize their approach to eliminate what they perceive as inappropriate tax avoidance. The recently issued BEPS Action Plan details where the OECD intends to focus its energies on cross-border taxation issues in the near term. Four of the fifteen action areas apply specifically to transfer pricing: intangibles, risk and capital, other high-risk transactions, and transfer pricing documentation. Several of the other action areas also have implications for transfer pricing.

According to EY's 2013 global transfer pricing survey, Navigating the choppy waters of international tax, 66 percent of companies identified risk management as their highest priority for transfer pricing, up 32 percent from the same survey conducted in 2010. This focus on risk management, as opposed to tax planning, is perhaps at odds with the commonly perceived public view of transfer pricing that exists in today's tax environment.

The survey also finds that companies are experiencing a significant increase in unresolved transfer pricing examinations and facing increased penalties and interest when tax authorities formulate assessments. Managing transfer pricing in emerging markets is a rising priority for multinational companies, even though 74 percent of those surveyed said they have no full-time transfer pricing personnel in those countries.

92 percent of the Swiss companies surveyed confirmed that a tax authority had examined a transfer pricing policy in the last three years. This is 10 percent higher than for the survey as a whole, indicating that the involvement of Swiss entity in a transaction increases the likelihood of a transfer pricing audit.

«Our survey indicates a clear shift towards prioritizing risk management in transfer pricing, which is hardly surprising given the current environment around tax controversy», says Nicholas Ronan, Head of Transfer Pricing for EY Switzerland. «We believe the environment will remain difficult for the next several years, and companies should prepare by making sure they have the right people and the right systems in the right places to properly manage the new sources of risk.»

Controversy on the rise
Nearly half of the survey respondents (47 percent) reported experiencing double taxation as a result of a transfer pricing audit. 24 percent of parent companies reported being subject to tax penalties in the past three years, in comparison with 19 percent in the 2010 survey and 15 percent in a 2007 edition of the survey. 60 percent of parent companies are also paying interest charges as a result of transfer pricing adjustments.

More than one in four (28 percent) said they had sought assistance from their own government to mitigate a dispute with another country's tax authority, which is double the amount when compared to the 2010 survey. Companies are also reporting an increase in litigation, 15 percent in 2013 up from just 4 percent in 2007.

Interestingly, whilst transactions involving a Swiss company were more likely to suffer an adjustment following a transfer pricing audit (45 percent vs. 24 percent for the survey as a whole) the 33 percent reporting an adjustment which led to double taxation was lower than the results for the survey as a whole (47 percent). This result may be an indication of the willingness of the Swiss tax authorities to support the taxpayer in negotiations with other competent authorities. This conclusion is further supported by the fact that Swiss companies were more likely to refer a matter to competent authority (52 percent vs. 28 percent) and that no Swiss companies reported double taxation following the use of the Mutual Agreement Procedure or arbitration, compared to 23 percent of those surveyed.

Limited skills in emerging markets
The 2013 survey found evidence that companies are struggling to align their resources with sources of controversy, particularly in emerging market economies. Among companies with operations in Brazil, Russia, India, China or countries in Africa, 30 percent identified those areas as their number one or number two priorities in terms of managing transfer pricing matters. Still, 74 percent of respondents surveyed said they had no full-time transfer pricing personnel in those countries.

Increasing efforts to comply
At the same time, companies say they are strengthening efforts to comply. Of all respondents surveyed, 70 percent indicated that they are fully compliant with transfer pricing requirements and regulations. Yet, fewer than 20 percent of companies say they monitor their financial results for compliance with their transfer pricing policies in real time or on a monthly basis, which is optimal. Few others have computer software in place to simplify and automate their compliance activities.

The report makes several recommendations to companies seeking to better manage risk and the compressed transfer pricing life cycle. They include developing high-standard documentation in a wider range of countries, considering how other tax enforcement mechanisms may affect transfer pricing, and better aligning resources to more efficiently respond to increased transfer pricing documentation requirements and controversy in rapid-growth markets.

Nicholas Ronan says: «The survey clearly shows companies are struggling to comply with the vast and ever-changing array of transfer pricing rules so they aren't doubly taxed. To succeed, they will need to take proactive steps to enhance their documentation, monitor changes around the world, and upgrade their technology to expedite analysis of financial results.»

Read more: download the survey below (PDF 68 pages)

About the Transfer Pricing Survey
EY's transfer pricing survey has been an industry benchmark chronicling taxpayers' views on this essential function of cross-border commerce for nearly 20 years. The report was compiled based on interviews with transfer pricing and tax professionals at 878 corporations in 26 countries, including 637 parent companies. Transfer pricing refers to the prices charged between entities within the same multinational group, for goods, services and intangibles, and can affect where within the group profits are taxed.

About the global EY organization
The global EY organization is a leader in assurance, tax, transaction, legal and advisory services. We leverage our experience, knowledge and services to help build trust and confidence in the financial markets and in economies all over the world. We are ideally equipped for this task - with well trained employees, strong teams, excellent services and outstanding client relations. Our global mission is to drive progress and make a difference by building a better working world - for our people, for our clients and for our communities.
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Mercredi 18 Septembre 2013