Many transfer pricing systems around the world are coming under unprecedented stress, as the global recession has forced companies and revenue authorities to reassess their economic expectations, a new study from KPMG's Global Transfer Pricing Services group has found.
Some tax authorities, under pressure to provide revenue to their governments, may be reluctant to accept that formerly profitable companies are now incurring losses, and therefore paying less tax.
This means that, to meet increasingly stringent tax authority requirements, taxpayers may have to find new ways to demonstrate that prices charged for inter-group transactions are appropriate.
A common problem highlighted by KPMG's research has been the lack of comparable transactions to act as benchmarks for intra-group commerce, as economic activity around the world has slowed.
"For example, the problem has been felt very acutely in the area of related-party loans." said Kari Pahlman, Partner in KPMG China's Transfer Pricing Practice in Hong Kong.
"Activity in the financial services sector fell to very low levels towards the end of last year and the beginning of this, so it was difficult to find similar but unrelated transactions to determine what the open-market rate of interest might be. Details like creditworthiness of the borrower, country of the borrower, amount and currency of the loan and even security features and covenants have become much more important in determining supportable loan rates."
"In addition, many multinationals are experiencing significant transfer pricing issues in the context of their Asian operations. Depending on how the recession has impacted operations, risks may arise in a form of reduced profits or local losses. Confronted with authorities with fiscal revenue shortfalls, such situations may prove to be very difficult to manage. On the other hand, many multinationals have continued to perform well e.g. in Greater China and therefore report profits locally. This might often bring up tax inefficiencies in case the more mature markets in Europe and USA have fallen to losses. Revisiting transfer pricing may offer opportunities to mitigate such inefficiencies."
"The economic events of 2008 and 2009 are really testing the whole transfer pricing system," said Steven Fortier, Global Leader of KPMG's Global Transfer Pricing Services practice, and partner in the US firm.
"This is a system that has been developed over a period of increasing globalization and prosperity. Now, it has to adjust rapidly to new, much more difficult conditions. Companies worldwide should take a careful look at the guidance from tax authorities, as well as what they do in practice, to help redraw their transfer pricing policies for a very different world economic climate."
"They should also think beyond the present situation and try to make sure their pricing policies can meet their long term objectives in good times as well as bad."
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Note to editors
The study cited in this release is "Planning for the recovery - examining transfer pricing in the current environment and beyond"
It is a collection of articles from leading transfer pricing professionals from KPMG member firms around the world, following on from the very successful "Meeting of Minds" study which was published in 2008. "Planning for the recovery" should be of particular interest to tax and finance corporate executives of multinational companies.
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.