As 2017 draws to an end, we can reflect on the year that’s been for transfer pricing and start to make predictions for the year to come. The below trends build on what we have seen in the market over the past few years, and give an indication of where we’re heading as 2018 looms closer.
Trend 1: Data. And it is big.
The pace of advancement in technology has been increasing over the past couple of years. With the proliferation of cloud solutions, and the uptake of Internet of Things, the level of data available to business, consumers, and governments is only going to keep increasing.
For transfer pricing, this means both the market and governments are starting to embrace technology to ensure they can keep pace with the times, and with each other.
Data management is only part of the story. Getting your data in order not only gives you the ability to be compliant and mitigate audit risk, but also empowers you to use analytics and forecasting to have a positive impact on your business. Are you confident your data is in shape?
Trend 2: The Globalisation of Tax
After the 2008 Global Financial Crisis, governments globally became increasingly concerned with protecting their tax base. What this has lead to is increased transparency between tax authorities in order to achieve this (e.g. OECD’s BEPS Action Plan, AEOI) and therefore increasing compliance requirements upon corporations. Transfer Pricing is leading a lot of this activity with BEPS Action 13, which has been widely adopted (57 countries so far).
This transparency means governments have more data about your business than ever before, with increasing digitalisation and increasing compliance requirements across most tax areas (e.g. SAF-T, Making Tax Digital). As the first BEPS Action 13 documentation requirements start flooding in (Country by country report, local file, master file) this will continue to increase, not to mention the fact that governments are then sharing the country by country reports with each other (so far 115 jurisdictions participate in the Convention on Mutual Administrative Assistance in Tax Matters). There are also still murmurings that some governments will make the reports public, or at least certain parts of the reports. And with the combination of all the data on your business and all the data of other businesses – the government truly has big data at its fingertips.
The above represents a fundamental shift in knowledge. The power moves from corporations to governments. How do you get the balance back?
Trend 3: Internal collaboration
The fact is, with the trends of big data and globalisation, being on the same page within your business is absolutely necessary. Everyone across all relevant teams and across the globe needs to understand and align with the corporation’s transfer pricing policies. Finance, tax and legal are becoming increasingly interconnected.
Reconciliation is important for ensuring alignment across the business. This includes between country by country report, local file and master file, as well as from a group financials level against financials reported from local controllers.
The kind of information the country by country report is asking for involves teams outside transfer pricing, in a way they may not have been involved with transfer pricing previously. We are especially seeing this with treasury. Treasurers are being increasingly required to provide evidence of materiality. This alignment is necessary in other areas too, for example, do your provision entities match your transfer pricing entities? If no – can you provide reasoning to the government about why there is a difference?
Trend 4: Increasing threat of audit and litigation
Staying on top of all different compliance requirements, dates, and filing mechanisms, can be an extremely burdensome process if you are tracking this manually.
And in the background, transfer pricing audits and litigation are increasing, and will likely continue to once the country by country reporting analysis by governments gets into full swing.
Within this increasingly uncertain environment, intercompany agreements are becoming a more important part in risk mitigation. This is not only because they are required for compliance (OECD requires you to list the agreements within Master File, and attach to Local file), but also because they provide a strong buffer to demonstrate internal compliance with transfer pricing policy. How robust is your process to track and file all of your obligations?
Trend 5: Transfer pricing and brand go hand-in-hand
It may not seem obvious that transfer pricing and your business’ brand go together, but when you think about the recent stories involving Google, Apple and Starbucks it does become clear. Transfer Pricing in the modern world is a political tool, interlinked with brand, which makes it an essential part of your business’ PR.
From the above mentioned news stories, the wider business world is becoming more aware that Transfer Pricing is about a lot more than doing the correct thing – it’s also about being seen to be doing the correct thing. Multinational Enterprises are the public’s new favourite ‘bad guy’, and it is irrelevant if they are acting within legal boundaries if they are seen by the public to be acting immorally.
The significance of brand and transfer pricing also means increasing scrutiny from the C-suite upon the tax team. The boardroom understands the brand risk and so needs effective presentation of the transfer pricing position of the business – meaning the tax department needs to be aligned across the various relevant teams, and across the world.
With country by country reporting as an example, considering ‘brand’ takes the exercise to an analytical level – more than just data gathering and submission. Every number needs to be thought about – does this fit with my organisation’s transfer pricing story? Do I have the correct details to justify this number?
As the above trends show, transfer pricing is undeniably a popular topic, requiring significant attention from nearly every business. ONESOURCE Transfer Pricing can take some of the burden off business by providing solutions to streamline each stage of the transfer pricing lifecycle.