Transfer Pricing: A Three-Dimensional Challenge

  • June 23, 2014

Transfer pricing remains  a major risk to companies around the world. In fact, it was the top tax risk identified by the 800-plus global tax and finance executives who participated in EY’s 2014 survey on Tax Risk.  The growing complexity of worldwide transfer pricing rules continues to present a three dimensional challenge for multinational companies ("MNCs") with respect to documentation requirements, transparency initiatives and audits.   Scrutiny of a company's transfer pricing is not only limited to tax authorities, but also now comes from the media and other activists and NGO's.

To address this ever evolving risk, it helps for tax professionals of MNCs to focus in on the following:

1) Documentation: If intercompany transactions are to withstand scrutiny, companies must maintain contemporaneous, defensible documentation; understand local country transfer pricing requirements; and consider engaging knowledgeable local advisers. In addition to meeting the minimum requirements it is useful for the documentation to present a compelling story in a clear and compelling fashion – one that conveys the taxpayer’s value chain, its competitive position in its industry, as well as financial results.

2) Transparency: New disclosure requirements and related transparency initiatives are driving the need for increased transfer pricing visibility. For example, more SEC registrants are disclosing transfer pricing issues in their annual filings. The Internal Revenue Service’s (IRS;) Schedule Uncertain Tax Positions (UTP) TY2012 Filing Statistics (as of February 28, 2014) show that transfer pricing is the second most commonly reported UTP among US taxpayers. Additionally, government leaders want more detailed insight into transfer pricing practices and their impact on tax collections.

3) Audits: Companies have been experiencing more frequent audits of their transfer pricing practices, and several signs indicate that this trend will continue.  For example, the IRS has realigned and consolidated its transfer pricing resources under a new team, Transfer Pricing Operations (TPO), which is headed by a single executive. This change reflects a recognition of the strategic importance of transfer pricing in the U.S.  Many global tax authorities – including those in Luxembourg, Italy and Poland – also have increased their scrutiny of  transfer pricing. Additionally, the proposed OECD country-by-country reporting (CBCR) template will also provide tax authorities with a new transfer pricing audit assessment tool.

Combined, the various dimensions of transfer pricing risk and scrutiny confirm that it should remain a top concern of global tax functions in the months and years to come.

You can read more about transfer pricing in a recent article in the International Tax Review.

Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information.


About this Contributor

Bernadette Pinamont Headshot
Bernadette Pinamont
Vice President, Tax Research

Bernadette Pinamont is Vice President of Tax Research responsible for leading a global team of 85 tax professionals who contribute subject matter and technical expertise to build and maintain content for all products, powering millions of effective tax rate determinations for customers in over 19,000 global jurisdictions.

Prior to joining Vertex, Bernadette was Vice President of Tax for Endo Pharmaceuticals. Bernadette's 30 plus year tax career also includes the corporate tax departments of AstraZeneca, DuPont, Syngenta, Tyco Toys, and, initially, EY. When Bernadette joined Vertex in 2013, she was a thought leader in the Chief Tax Office and engaged both industry and clients on the trends, patterns, and emerging solutions to address the global challenges associated with regulatory compliance and tax technology.

Bernadette regularly speaks at local and industry events about tax and the importance of technology, including the annual International Tax Review’s (ITR) Women in Tax Forum. She leads the Philadelphia Women’s Tax Network and is a graduate of Seton Hall University, from which she earned both a B.S. in Accounting, Summa Cum Laude, and her Juris Doctor. Bernadette is also a licensed attorney and a CPA.

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