Long-term growth in international trade, combined with the challenging global economic environment and growing fiscal deficits, has many governments focused on tax base protection.
KPMG, the global network of professional service firms providing Audit, Tax and Advisory services, today has published the results of KPMG International’s Global Transfer Pricing Review.
According to KPMG International’s Global Transfer Pricing Review, this trend has heightened government scrutiny of transfer pricing matters, including issues such as attribution of losses, business restructuring, intellectual property migration and intercompany financing transactions.
Transfer pricing is one of the highest priority issues for the tax authorities in both the United States (US) and Canada. Internal Revenue Service (IRS) auditors are turning to transfer pricing enforcement as the mainstay of their investigations of Multi National Enterprises (MNEs). In the US, there is a focus on the outbound transfer of intangibles, with a particular emphasis on cost sharing arrangements. Intercompany services also continue to come under increasing scrutiny in the United States.
Canada continues to justify its reputation as one of the countries with the toughest transfer pricing audits. Canadian companies have seen audit adjustments that slash outbound royalties and require relatively high levels of operating profit based on the view that the Canadian company or market has unique characteristics that would garner substantial profits at arm’s length.
In Latin America, a decade and a half ago, the region was a rules-free zone as far as transfer pricing was concerned. Today, many countries in the region have transfer pricing rules, mostly based on Organisation for Economic Co-operation and Development (OECD) guidelines. Brazil, however, continues to operate under a system of statutory margins that is not based on the arm’s-length standard. In light of this stance and Brazil’s importance as a trading partner in the region, MNEs must tread carefully in their intercompany transactions within Latin America.
Tax authorities in the Asia Pacific region continue to heighten their scrutiny with new compliance initiatives, growing budgets for investigations, and a renewed emphasis on transfer pricing. While each jurisdiction has its own story, the general trend is increased standardization of transfer pricing practices within each regime, and, to some degree, across the region.
One particularly important area of development is that of advance pricing agreements (APAs). The past decade has seen an increasing number of Asia’s tax authorities offering APAs, with several new APA programs across the region at varying stages of development. The number of APAs completed by Asia Pacific countries continues to grow, with close to 100 bilateral APAs being conducted per year by Japan and around 20 or 30 APAs per year concluded by Australia and Korea. The United States, for comparison, was concluding more than100 APAs per year in 2006 and 2007; however, this number has now fallen to around 70 per year.
The expansion of transfer pricing rules across Europe is nearly complete. Governments in the region encourage MNEs to comply with documentation either by introducing documentation rules (e.g. France and Greece) or by introducing penalty protection schemes (e.g. Italy). Other countries are on the brink of introducing transfer pricing rules covering not only documentation, but also material transfer pricing guidelines (e.g. Ireland, Austria and Russia).
Mutual agreement procedures and APAs have increased in number, and involve more EU countries. In the past, MNEs often accepted double taxation unless the impact was material. Today, the increased level of transfer pricing audits in many countries has led to a change of policy by many taxpayers.
According to KPMG’s Global Transfer Pricing team, the keys to companies confidently managing their transfer pricing issues include:
KPMG International’s Global Transfer Pricing Review is compiled from information supplied by various KPMG member firm professionals who provide transfer pricing services. The review offers discussions and comprehensive overviews of transfer pricing compliance requirements in 64 countries.