Bet that BEPS measures will affect your transfer pricing

Organizations engaged in cross-border business need to think hard about their transfer pricing policies, from how transparent their transactions are to how they collect and manage data and communicate between departments. Assessing policies is especially important since the Oct. 5 release of the final package on base erosion and profit shifting (BEPS) measures from the Organisation for Economic Co-operation and Development (OECD). The package represents global leaders’ coordinated commitment to combat BEPS, or the negative effect of multinational companies’ tax avoidance strategies on a country’s tax base. (For more on the package, see our Oct. 13 article in Tax Hot Topics.) Part of that commitment will be to make sure multinationals’ transfer pricing policies hold up to increased scrutiny.

BEPS and transfer pricing

The OECD’s measures, agreed to by the G-20 — a mix of the world’s largest advanced and emerging economies — address a variety of ways to support an international tax system that ensures all jurisdictions get their fair share of taxes. The standards address treaty shopping, country-by-country reporting, transfer pricing and more. The revised guidance on transfer pricing may apply immediately in certain countries: Australia, for example, is leading the way in adopting the new guidance.

The guidance updates and bolsters transfer pricing requirements, looking not just at financials but also at nonfinancial data, such as headcount. It makes it easier for taxing authorities to ask pointed questions about intercompany transactions and more thoroughly evaluate multinationals’ tax practices. The more scrutiny, the faster additional data will be needed. When an organization receives notice that its tax policies are under review, it often has only four to six weeks to demonstrate consistency with the arm’s length standard and compliance.  

Organizational transfer pricing

With the stepped-up inspection sure to arise with the BEPS measures, organizations may want to consider an “organizational” approach to transfer pricing. Organizational transfer pricing (OTP) refers to the use of enterprise resource planning or other IT systems to create technology-based platforms for transfer pricing. These methods monitor and implement — down to the general ledger level — the rules and policies used.

Benefits of an OTP system include:
  • Creation of a governed, baked-in system that identifies key drivers and shows how expenses flow through an organization. This eliminates the risks associated with the traditional transfer pricing method of using multiple homegrown spreadsheets and an unsecured email data-capture system.
  • An automatic link to the general ledger and other data sources. It provides results regularly, demonstrates compliance under an audit, collects data easily, and shows traceability and accountability. This helps prevent a mad scramble to manually find data when an issue arises.
  • Added value: The transfer pricing team can spend less time locating and running spreadsheets — essentially acting as clerks — and move on to more value-added activities.

What is transfer pricing?
On a basic level, transfer pricing is the price of goods or services when they’re sold to controlled or related entities within an enterprise. For example, if a subsidiary sold goods to a parent company, the cost would be the transfer price. An organization’s tax department is obligated to annually demonstrate that it understands and complies with the rules that govern transfer pricing. Essentially, transfer pricing is about distributing profits for tax and other purposes among all the players, so that each taxing authority gets the proper amount.

Transfer pricing rules are based on an arm’s length standard: A transfer price should be the same as if two (or more) companies involved were independent — not part of the same corporate structure. In other words, a global company may have many entities under its umbrella, yet it still has to conduct transfer pricing policies as if each is unrelated.
Before investing in an OTP system, be sure you need one. Then make sure you get the right one by addressing several questions:

  • Are you in more than five countries? If not, consider doing a high-level assessment of your transfer pricing system to see if an OTP method makes sense. If you are in more than five countries:
  • Do you have more than two transaction types in each country? If not, conduct an ROI analysis. If you have more than two transaction types (i.e., intellectual property, tangible goods and a tiered service center), are your consolidated revenues greater than $750 million? If not, assess whether a packaged or less-expensive custom solution might be right for your organization. If you are in a variety of countries and your revenue is closer to $250 million, a customized OTP system may be just right.

Before you go there

Having a certain amount of revenue is important before you invest in OTP measures because OTP systems are expensive. Of course, the tax consequences of missing a target and facing possible penalties and reputational damage are expensive, too. Consult with a tax professional to see if OTP is right for your organization.

Ryan Osgood
T +1 617 973 4785

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