Most governments around the world are extending and tightening controls over cross-border transactions between companies within the same group, as they look for new sources of tax revenue, a new survey from KPMG's Global Transfer Pricing Services practice has found.
Businesses operating in countries such as China, Malaysia and Vietnam now have to contend with new or greatly expanded transfer pricing regimes, while virtually all the larger economies, which already have transfer pricing regulations in place, are intensifying their audit programs and tightening their rules.
Transfer pricing reviews typically focus on comparing transactions between companies in the same multinational group, with similar transactions between unrelated companies - so called "arm's-length" transactions. Authorities typically levy taxes and impose penalties on companies where their internal pricing is found to deviate from arm's length pricing.
Transfer pricing audits are becoming increasingly common, as many governments develop greater experience in analysing transfer prices and seek to protect their respective tax bases.
The KPMG survey looks in detail at transfer pricing regulations in 60 countries.
Interestingly, some tax authorities in developed economies seem to be moving away from a strict rules-based interpretation of tax liabilities, and towards a "taxation by negotiation" approach.
While this might offer opportunities to reduce tax bills, "taxation by negotiation" has a disadvantage that it can increase uncertainty for large corporate taxpayers, many of whom value a predictable outcome to their transactions.
At the same time, certain authorities, such as the US IRS, have broadened the issues that can be covered by advance pricing agreements (APAs). These are agreements made in advance between taxpayers and revenue authorities on the prices, and therefore the tax, that will be attached to a particular type of transaction.
APAs are popular among companies seeking for predictability and upfront management of transfer pricing risks, with the available APA programs attracting increasing numbers of applications across jurisdictions.
The survey records a steady stream of new regulations from many of the large economies in Europe and North America, governing documentation requirements, the application of transaction based methodologies and valuations of intellectual property and business opportunities. It also points to increased interest among the developing economies in Eastern Europe and even in Africa in introducing transfer pricing regulations, following a flood of new investments from companies wanting to take advantage of lower costs and favorable tax regimes.
But it is in the Asia Pacific region where the authorities seem to be the most active on transfer pricing. India, Australia, China, the Republic of Korea and Japan have all recently seen an increase in audit activity, and China and Singapore's tax authorities have recently signaled that they intend to step up their transfer pricing compliance and field audit work.
The result is that Asia Pacific tax authorities are seen by many multinational companies as the toughest in the world in this field.
"With the profits of many multinational enterprises shrinking," said Kari Pahlman, Partner, Global Transfer Pricing Services, KPMG China, "tax authorities can be expected to ratchet up their audit activities to ensure that each of their jurisdictions gets its fair share of a shrinking pool of tax revenues. This is likely to require international companies to enhance their transfer pricing defense and compliance wherever they operate."
"In the parts of the world where bilateral tax treaties that can provide a mechanism to resolve these disputes do not exist, these cases can be very hard to defend. Hong Kong is an example of a jurisdiction with low number of tax treaties and accordingly, Hong Kong companies with overseas operations may find transfer pricing disputes extremely penalising. In addition, Hong Kong is also expected to introduce regulatory measures governing transfer pricing in the near future. A strong, defensible, transfer pricing policy and proper implementation therefore becomes more important for Hong Kong based international companies with every year that goes by."
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Note to editors
KPMG's Global Transfer Pricing Review is designed to help multinational companies stay current with transfer pricing rules worldwide. Compiled from information provided by KPMG member firms, the Review offers detailed information on transfer pricing regulations in 60 countries.
KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 144 countries and have 137,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss cooperative. Each KPMG firm is a legally distinct and separate entity and describes itself as such.