Transfer pricing as the biggest tax challenge

Transfer pricing as the biggest tax challenge

As a joint survey conducted by KPMG and the University of St. Gallen revealed, two thirds of the companies have not yet formulated a clear, fundamental tax strategy. And only one in ten considers after-tax figures to be key indicators of the success of their management activities. More important performance indicators include how transfer pricing is handled and greater involvement by the executive committee and the board of directors.

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Taxes represent one of the biggest cost drivers for businesses. New statutory and regulatory developments like Corporate Tax Reform III and the OECD’s BEPS action plan will present a host of complex challenges in the area of tax management in the future. KPMG and the University of St. Gallen surveyed more than 50 tax officers (CFO or Head of Tax) at Switzerland’s largest companies on the topic of how they manage their tax obligations.

Pre-tax income is more interesting than after-tax income

87% of the companies rate their tax risk profile as medium to high and only one of every ten companies surveyed considers its after-tax figures, such as profit after tax, to be key financial indicators of successful management. Most companies focus on earnings before interest and taxes (EBIT and EBITDA). Other key criteria for measuring successful tax management include the timely, accurate handling of tax-related matters, the prevention of tax risks as well as relieving operational management of tax-related issues.

Desire for greater involvement by the executive committee and board of directors

The survey also brought to light that nearly all of a company’s employees entrusted with tax-related duties would like to see greater involvement on the part of top-level management. Despite the fact that Switzerland’s large companies are aware of the transformation taking place in the international tax landscape, most do not know where the journey is headed. Two thirds of the companies polled have not yet formulated a clear, fundamental tax strategy. Another of the survey’s insights is that a company’s CFO or specially appointed Head of Tax has primary responsibility for defining such a strategy. Here, greater involvement is expected on the part of the board of directors. In those companies where responsibility for organizing a tax function lies with the CFO or Head of Tax, there is a desire for greater involvement on the part of the executive committee or CEO as well as the board of directors. In the case of decentralized companies, responsibility for fulfilling tax-related regulatory obligations often lies with the local tax managers on site. They, however, would like to see greater involvement and more input from corporate headquarters. After all, dealing with tax issues is a complex, risky undertaking. That makes it all the more important for relevant tax managers to be able to get the operational and strategic level of management involved in key decisions.

Transfer pricing is by far the hottest topic

Most tax officers would prefer greater involvement by top-level management on issues related to transfer pricing and indirect taxes, as well. No other issue is considered quite as important as that of transfer pricing management. In addition to a higher level of involvement by the executive committee and board of directors, many respondents indicated that internal processes and the IT infrastructure also harbor optimization potential. A striking surge in investments is expected over the next few years, particularly in the area of technology.

Optimization potential in terms of tax transparency

In light of the fact that the general public is taking a growing interest in the tax plans of companies with an international focus and international operations, the tax transparency of these enterprises vis-à-vis third parties will have to improve even further. Enterprises are apparently experiencing increasing public pressure for tax transparency. Despite this pressure, only about one third of the companies surveyed have formally defined their tax strategies. At many companies, the topic will only be on the agenda sometime in the future.

Corporate survey on tax management

KPMG Switzerland collaborated with the University of St. Gallen to survey 54 of Switzerland’s largest companies on the topic of tax management. Nearly all of those who responded were the tax officers (CFO or Head of Tax) of the companies contacted. The vast majority of these companies have an international focus with 77% responding that the international component outweighs their domestic business. Around two thirds of the companies that took part in the survey have more than 50 foreign legal entities and 78% generate annual revenues in excess of one billion Swiss francs.

© 2016 KPMG Holding AG is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved.

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