Transfer Pricing Once Again the Focus of International Tax Authorities Thanks to BEPS
Discussions on the topic of transfer pricing are again gaining steam given more stringent international guidelines, which can be a sensitive issue for companies. Often within multinational corporations, internal revenues are just as important as revenues generated externally. The OECD is attempting to address the subsequent tax and revenue opportunities for international companies with its action plan to address BEPS (base erosion and profit shifting).
Internal Transactions Account for More than Half of World Trade
International tax authorities are very interested in transfer pricing, which is not surprising when you consider that internal transactions are estimated to represent more than half of the overall world trade. And now, the international tax authorities want to know more details on this half of global trade than was previously the case. BEPS is intended to provide increased transparency, consistency in reporting requirements and tax planning security for all parties involved, for example by breaking down reporting on internal sales into a master file, a local file, and country-by-country reporting.
International Standardization Unfortunately Not Yet a Reality
However, it is precisely this desired consistency and predictability that are lacking so far in the process of implementing the proposed measures. Many countries have been quick to adopt the OECD’s proposal, but the implementation has been anything but consistent. For example, some countries have introduced CbC Reporting but not adapted their local reporting guidelines to it. Other countries, on the other hand, have added the idea of breaking down reporting into a master and local file but have yet to implement the guidelines recommended by the OECD.
A Strategic Approach Is Now Required
At the moment, multinational corporations generally associate the new reporting requirements with significant additional effort and costs while at the same time experiencing uncertainty about the exact requirements. Until now, it was not seldom the case that comprehensive reporting of internal sales was limited to suspected high-risk business units. Now, corporations are structurally compelled to implement strategic planning in order to collect, evaluate, and prepare all necessary data across the entire group, broken down both globally and by country for individual branches.
Potentially Devastating Lack of Compliance
Many companies have neither uniform processes nor professional IT solutions for these complex tasks, and they have not yet clearly defined the responsibilities for each task. Business units that may be involved such as the tax department, accounting and controlling often pass the buck to each other, which can easily lead to accusations of organizational failure in case of a negative tax inspection. Subsequently, management may have to pay back taxes or even worse run the risk of claims for damages due to negligence or intent.
Companies Must Act Now
Companies should therefore implement preventive measures now in order to professionalize and automate their reporting processes as much as possible. A company-wide compliance management system for taxes is an important step that can lead to a more lenient assessment by many tax authorities in the case of back taxes.
OECD Is Also Taking Corrective Action
The OECD has also recognized the need to make improvements when it comes to BEPS. The measures in different countries which can vary widely, inaccurate wording of individual measures and frequent changes have led to a high level of uncertainty on taxes for companies. In a first step, a list of countries for CbC Reporting was recently published with information on the status of implementation of the action plan as well as national regulations to be observed. The affected companies will have no choice but to remain abreast of the current status and adapt their actions accordingly.