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 China now have to contend with a new transfer pricing regime, as well as increasing scrutiny from the State Administration of Taxation ("SAT"), which has issued up to 15 new circulars that have TP components even after the release of the new transfer pricing regulations at the beginning of this year.
The general focus is on transfer pricing issues among large enterprises, as well as targeted investigations of industries. In addition, the circulars have covered tax havens (as they relate to controlled foreign corporations) and losses related to the economic downturn. Advance Pricing Agreements (APAs) applications are also increasing, and China has just seen its first Bilateral APA with a European Country (Denmark). 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.
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 examines transfer pricing regulations in 60 countries. In Canada, the tax authorities seem to be moving away from a strict rules-based interpretation of tax liabilities, and towards a "taxation by negotiation" approach. By contrast, the US tax authorities have broadened the issues that can be covered by APAs.
In Europe, the survey records a steady stream of new regulations from many of the large economies, 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 Eastern European states 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 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 Steven Tseng, Partner-in-charge, China & Asia Pacific Leader, 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 has the potential to require international companies to defend their transfer prices 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. As with more and more transfer pricing cases in China, a strong, defensible, transfer pricing policy and proper implementation becomes more important for large international companies in China 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.