5 Challenges Of Transfer Pricing To Consider
Posted by Valentiam Group on March 9, 2021
Companies that operate in multiple countries face a number of issues never encountered by those with operations based exclusively in one country. The challenges of transfer pricing are among the most complex.
By its very nature, transfer pricing is complicated, not only in its technical aspects but also because it always involves satisfying compliance and reporting requirements in more than one jurisdiction. Those requirements can vary substantially from one jurisdiction to the next.
In this article, we’ll examine the five biggest challenges and problems of transfer pricing that tax directors and transfer pricing directors must manage and offer tips on how to deal with each challenge.
Top 5 Non-Technical Challenges Of Transfer Pricing
While the following list is not exhaustive, it represents the top five non-technical transfer pricing challenges that companies with international operations must navigate.
- Balancing compliance requirements with the cost of meeting those requirements: Whether transfer pricing compliance is handled in-house or by an outside consultant, it can be costly. Almost every country has some type of reporting requirement for local transfer pricing regulations that the company must perform in order to show compliance. In most cases, this will involve creating a report consistent with OECD or local guidelines. For companies that do business in multiple countries, this can be a very costly exercise. The challenge is in figuring out where the compliance budget is best spent.
One way to make that determination is to look specifically at the requirements of the different countries and identify where there might be penalties for compliance errors or failures. Does the compliance report have to be submitted to tax authorities or is it required to just be kept on file? How aggressive are the tax authorities in the jurisdiction in regard to transfer pricing? How material are the intercompany transactions? Are there financial risk factors to consider?
Companies can deal with this challenge by performing a transfer pricing risk assessment and giving greater focus to compliance efforts in the countries where the risk is highest. In most cases, there will probably be less risk if the local operating unit is making money rather than losing it. After considering all of the factors, tax or transfer pricing directors can allocate their compliance budget in accordance with the areas of greatest risk.
- Staying on top of the operational aspects of transfer pricing: This involves keeping up with the day-to-day aspects of transfer pricing—ensuring that actual results are falling in line with the company’s established transfer pricing plan or policy, managing information requests from tax authorities, and handling inquiries from local affiliates on transfer pricing related matters. Though these are routine daily tasks, they can take up a significant amount of time.
- Ensuring that transfer pricing structure is consistent with local and global transfer pricing guidelines and requirements: In addition to making sure that reports align with the format and guidelines established by taxing authorities in countries where the company operates, a major transfer pricing challenge is thinking into the future.
Once a transfer pricing structure has been set up, it can be difficult and costly to change. Transfer pricing and tax directors have to anticipate what tax authorities will do in the future. For example, the OECD BEPS regulations may not have changed transfer pricing structure, but they did introduce more transparency, making tax authorities aware of how different companies handle transfer pricing. Other changes to local tax laws and regulations are a regular occurrence.
For example, in the past, many U.S. companies have moved intangible assets offshore to lower tax jurisdictions. Changes to the U.S. corporate tax code in 2017 made it more advantageous to bring those assets back to the U.S. in certain circumstances. Now, with a new administration, the law may change again.
Each of these changes has an impact on transfer pricing; there are costs associated with every change, including potential exit taxes when assets are moved from one jurisdiction to another. Tax and transfer pricing directors must perform a balancing act in determining how to respond to changes in tax structures which may be imminent in each of the jurisdictions where the company operates.
- Determining whether to centralize or decentralize transfer pricing compliance: In some cases, it might be beneficial to at least partially decentralize oversight of compliance, particularly if the company has operations in a jurisdiction where the tax authorities are very aggressive. This situation may call for oversight by someone who is in the country to ensure the company is following local guidelines and to maintain a point of contact with the local tax authority.
In most cases, however, decentralization of oversight can create more problems than it solves. It will probably be more costly, and there is a potential risk of losing a consistent message if there are 15 different transfer pricing advisors each doing something differently in each country.
The benefit of centralized oversight is that messaging can be better controlled and all reports will be aligned with what the company has communicated to tax authorities.
- Determining the impact of the COVID-19 pandemic on transfer pricing and how to react: This will hopefully be a short-term challenge of transfer pricing. Many companies’ financials have been negatively impacted by the pandemic; the question is, should they change their transfer pricing in reaction to those impacts?
This is a big challenge for many companies in the current moment. Many transfer pricing structures are set up to guarantee a certain level of profit to certain parts of the supply chain. If the enterprise earns a 10% margin and an entity in the supply chain is guaranteed a 2% profit, what happens when the enterprise’s margin shrinks to 1%? Does that entity still receive the guaranteed 2% margin?
The best answer for each company may differ based on a number of factors—but for many of them, this is currently one of the biggest problems of transfer pricing.
While these problems of transfer pricing are less technical than most others, they still require careful consideration because they can have a significant impact on both taxes and profits. As such, companies should keep them in mind when designing, implementing, or revising transfer pricing strategies.
We’ll help you navigate transfer pricing.
Transfer pricing can be complex and confusing, but it doesn’t have to be that way.
Valentiam’s world-class transfer pricing specialists deliver innovative, thoughtful, and 100%-supportable strategies you can actually implement. It’s our goal to design economically-sound strategies that your company can also easily administer. With the help of one of our seasoned experts, you can maximize company profits and minimize audit risk. Let’s talk about your unique transfer pricing challenges and how Valentiam can help solve them—schedule a free discovery call today.
Topics: Transfer pricing
We are pleased to announce that Josh Walls has joined the Valentiam Group as a transfer pricing partner in our Los Angeles office.