6 ways transfer pricing is crucial for multinationals

Plants responsible for sourcing, which were crucial for domestic production, were typically 100% owned by Japanese companies, while plants producing end products for local markets were often joint ventures with local partners (Doz and Prahalad, 1980). Bearing in mind the fact that most developing countries have no specific TP units and largely rely on general tax auditors, mixed teaming could be adopted, whereby the audit could be one audit, focussing on TP and general tax matters. In the same vein, an audit team with various experts such as engineers, accountant, lawyers and other specialists could be assembled, depending on the business being audited. This would allow flexibility in resource allocation, skills and knowledge (considering these are limited in developing country contexts). Another way could be to pair the novice TP auditors with more senior, skilled and experienced auditors to boost knowledge-sharing (UN, 2017). The revenue authorities can outsource the services of tax consultants, technical specialists and legal advisors in order to enhance the capacity and capabilities of the TP audit units of developing countries, but bearing in mind the likely conflict of interests that can arise with these outsourced specialists (OECD, 2012).

Transfer pricing can, however, also be employed for dishonest and unlawful goals, such as tax avoidance through the deliberate manipulation of transfer prices, including over- and under-invoicing in transfer pricing transactions. To make sure that transfer costs paid by firms are equivalent to those between unrelated businesses, governments rely mainly on “arm’s length pricing” (Kumar et al., 2021). For politicians and researchers, the effect of transfer pricing on tax revenues—particularly in developing countries—has emerged as a critical concern. Multinational corporations (MNCs) have been charged with tax-motivated profit shifting, which is said to erode tax bases and lower tax collections for developing countries (IMF Working Paper, 2019). In order to combat income shifting from high-tax to low-tax jurisdictions, which results in double non-taxation or even under-taxation, ideas for fundamental adjustments in the international tax system have been made (Büttner and Thiemann, 2017).

  1. Consider alternative dispute resolution mechanisms, such as mediation or arbitration, to seek a mutually acceptable resolution with tax authorities.
  2. The audits are guided by upfront risk profiling before full audits are carried out (Deloitte, 2014; Price Waterhouse Coopers, 2015).
  3. Kabala and Ndulo (2018) define a general auditor in tax administration as one who is “tasked with overseeing all taxes such as valued added tax (VAT), pay as you earn (PAYE), corporate income tax (CIT)”.

For those businesses that are seeing a severe collapse in demand for their products and services, however, standard transfer pricing approaches will need to be applied flexibly to reflect the challenging economic reality. The current international tax-transfer pricing system is generally built upon the notion that taxation in a particular jurisdiction is triggered by traditional concepts of nexus—i.e., taxable presence. Therefore, BEPS 1.0 would not suffice, and new waves of legislation began to emerge from an OECD perspective. While transfer pricing regulations have been in place for nearly three decades in the U.S. and other countries within the OECD, and in broad statutes and case law dating over a century, the pace of regulatory change in the past decade has been dramatic.

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The figure portrays the percentage of participants who alluded to the particular factor affecting the effectiveness of the audit and dispute resolution processes. The number of participants pointing to the particular factor is also shown to enhance the interpretation of readers. Discussions of the views of these participants and direct quotations are used to enhance the explication of these findings. Pointing to the gap between legislation and its enforcement, Oguttu (2016), alludes to weak administrative capacity, the absence of international laws and weakly developed TP laws leading to abuse of treaties as the major reasons explaining the situation in developing counties. The global nature of MNEs presents them with opportunities for the creation of global channels for corporate tax avoidance that are embedded in their operations. Ní Chasaide (2020) states that the opaqueness of MNEs transactions, strategies and channels used for TP and their implications are not easy to pinpoint or unpack, hence these present auditors with formidable channels when trying to follow the audit trail of these transactions.

The sheer volume of transfer pricing reports required can be overwhelming for tax departments, and with the increased focus on value chain reporting, the level of financial data detail required for the analysis may not be readily available in many enterprise resource planning systems. However, if the process is effectively managed, quality transfer pricing reports serve to mitigate controversy by establishing the framework that documents the appropriateness of the transfer prices. Furthermore, a coordinated global transfer pricing policy provides consistency and reduces the administrative burden in managing an organization’s intercompany transactions. On the other hand, the lack of transfer pricing documentation, or even poor-quality transfer pricing documentation, invites tax authorities to initiate further reviews and, in worst-case scenarios, may paint a clear road map for tax authorities to identify transfer pricing exposures. The studies highlight MNCs’ widespread use of tax evasion techniques, including transfer pricing, and their potentially detrimental effects on tax collections and debt ratios.

The report also emphasizes the need for more accounting transaction openness and the potential risks and restrictions of transparency measures to enhance compliance with transfer pricing regulations. The diversity of MNEs, the geographical size of MNEs, the scope of TP legislation, the magnitude and intricacy of TP transactions, the expansiveness of the tax base all have an implication on the resources required to carry out an effective TP audit. UN (2017) emphasises that TP audits tend to be both resource (financial, technical and human) and time-intensive.

Literature review

Complex questions never have straightforward answers, though there certainly will be pros and cons from a practitioner perspective. On the one hand, robust intercompany pricing, monitoring, and documentation becomes more important each year, as intercompany pricing arrangements under the arm’s length standard fall into the crosshairs of tax administrations, especially in the age of digital audits. From a U.S. perspective, the TCJA introduced additional base erosion measures and incremental baskets of taxation on global profits of multinationals—i.e., minimum global taxes—among other new concepts, such as lowering the statutory corporate tax rate. For taxpayers, this means that a thorough functional analysis across the entire supply chain is highly important to appropriately characterize each entity’s functions, assets and risks.

Tax Cuts and Jobs Act of 2017, or TCJA, increasing the risk of double taxation particularly for U.S.-based multinational companies. Assuming Alpha charges Beta and Gamma a low
price (in relation to what Alpha incurs to provide those services) for
marketing and administration services, taxable income effectively
would shift away from Alphas high-tax jurisdiction and to Betas and
Gammas low-tax jurisdictions. Thus, if Alpha received a transfer price
of $80,000 ($40,000 each from Beta and Gamma) for marketing and
administration services that cost $100,000 to provide, challenges of transfer pricing Alphas income
would be reduced by the $20,000 difference. Correspondingly, Betas and
Gammas income would be $20,000 higher because they are paying only
$80,000 as opposed to the full $100,000 that Alpha incurs to provide
the services. Now suppose Example assigns a transfer price of $17,000, resulting
in Canadian taxable income equivalent to US$2,000 and taxable income
from U.S. sources of $7,000. If the U.S. authorities reject Examples
transfer prices, they may tax the entire $9,000 profit even though
Canadian income tax also is paid on the Canadian portion.

The study’s research shed light on how multinational corporations’ (MNCs) taxation, investment choices, profit shifting and tax evasion are affected by transfer pricing. They (de Mooij and Liu, 2020; Marques and Pinho, 2016; Vicard, 2015; Wier, 2020; Liu et al., 2017) emphasize how transfer pricing restrictions affect investment and profit shifting. The connection between tax evasion, transfer pricing practices and tax receipts is frequently emphasized (Richardson and Taylor, 2015; Amidu et al., 2019; Flanagan, 2017). The importance of global comparisons and general equilibrium impacts is emphasized (Büttner and Thiemann, 2017; Davies et al., 2017; Kumar et al., 2021; Cristea and Nguyen, 2016; Choi et al., 2020), and the role of intangible assets in transfer pricing decisions is discussed (Sari et al., 2022).

It can provide alerts and reminders for key dates, ensuring timely submission of required documentation and filings. These regulations have been consistently updated to addresses the practical administration of transfer pricing programmes by tax administrations. The reports guide the management of transfer pricing programmes, so that transfer pricing audits and enquiries are conducted efficiently and in a timely manner, for the benefit of MNEs and tax administrations alike. It is concerned with the practical steps tax administrations need to take to correctly identify transfer pricing cases that merit audit or enquiry and then to progress those cases to as early a conclusion as possible. From a transfer pricing perspective, the above changes can be viewed as narrowing the sandbox of wider profits in which the arm’s length standard is applied, as competing legislative frameworks at a country and global level aim to tax more profits on non-arm’s length terms. However, as the digital economy became more prevalent in the years following BEPS 1.0, tax administrations, the OECD, and other bodies were of the view that further reform was needed.

2 Challenges/Factors Affecting the Effectiveness of Audits and Dispute Resolution in Zimbabwe

Based on a literature review, this talk seeks to identify and address five typical transfer pricing research issues. This essay addresses the transfer pricing research themes and examines the research issues raised by 30 papers. This talk will then give a general overview of academics’ difficulties and opportunities while researching transfer pricing, as well as possible directions for future research.

The havens conceal information on behalf of their clients or deliberately take long to avail the information or provide one that is incomplete (OECD, 2012). Blouin & Robinson (2020) emphasise that discussions on how to mitigate the scope and effect of BEPS transactions by MNEs are a hot topic in developing countries. Successful audits of MNEs transactions especially those involving TP as well as effective dispute resolution are essential to enable productive efforts to regulate TP transactions and curb tax avoidance.

World Impact

This systematic literature review sought to assess transfer pricing research over the last nine years in great detail (2014–2022). The review of transfer pricing research is based on the study of twenty-nine research publications from the Scopus database, and it highlights the top authors, techniques, findings, theoretical and empirical gaps and potential future research issues. The report identifies five key research questions for graduate students pursuing advanced degrees in this discipline. These issues involve evaluating the efficiency of transfer pricing rules, looking at various tax avoidance prevention measures and examining the impact of transfer pricing on other economic outcomes.

We are pleased to announce that Josh Walls has joined the Valentiam Group as a transfer pricing partner in our Los Angeles office.

The authors conclude that where TP regulations are strictly applied and related parties tightly scrutinised MNEs were discouraged from moving profits to lower tax jurisdictions and tax havens. Cooper, Fox, Loeprick, and Mohindra (2017) adduce that effective implementation of TP regulations is advantageous in a number of ways. Effective TP rules further bring equity in the treatment of both local and foreign investors, hence showing stability and consistency in the investment climate. Finally, the TP regulations help to preserve and protect the competitiveness of local industries from TP (Cooper et al., 2017; Mashiri, 2018). Despite the importance of TP audits and effective dispute resolution being underscored by a number of researchers, these activities face several hurdles, especially in developing countries. Additionally, the issue of tax income collection for developing nations, which historically relied on taxing big formal businesses, is threatened by multinational corporations’ manipulation of transfer pricing (Wier, 2020).

To effectively deal with the challenges calls for a proactive and continues outlook on transfer pricing. Its of key importance that your team have knowledge of the documentation requirements, transfer pricing methods accepted, and compliance obligation. In order to ensure continuous training that is attached to technological advancements and keeping with the best practises in TP regulation, audits and dispute resolution, developing countries can set up training units for tax issues nationally or regionally or even continentally. This could be done through the bodies such as ATAF and have these units fully equipped technologically and with the requisite human capital to conduct the training on TP matters and other tax matters. There is a need to enhance training facilities to improve the database, the TP systems as well as information in developing countries as these are viewed as not comprehensive or focused enough. UNECA (2018) avows that in Africa, training needs to be focused on African issues as in most cases where personnel is sent for training or seconded to learn in developed countries where technological development are advance and capacity, the training tends to be out of grip with the realities of the African continent.