A new world in transfer pricing?

The UK economy remains fragile as the lockdown eases and we attempt to kick-start many sectors again. Government financial support and policy has prevented – or indeed delayed – the collapse of many businesses, but it is unclear how the global economy as a whole will recover over time. Having said that, it is clear that governments have added huge amounts to national debts during this crisis to help businesses of every size. The UK Coronavirus Job Retention Scheme is estimated to be costing the UK government £14bn per month, with a more flexible policy announced until October. According to the Office of Budget Responsibility, the direct effect of government actions in relation to the coronavirus could end up costing the UK taxpayer more than £100bn—nearly equivalent to the entire NHS budget. All of this may change how society views the future financial dealings of organisations who have benefited from these government schemes, which could have knock-on effects for future tax policy. The transfer pricing tightrope One result of this crisis could be that governments start to scrutinise the tax affairs of multi-nationals more closely, becoming more aggressive with enforcement. In particular, this means multinationals will need to ensure their transfer pricing policy is watertight if the authorities query the numbers booked. Transfer pricing is how subsidiaries within a group trade with each other, and the price at which that trade takes place. Typically, transfer prices are priced based on the going market rate for that good or service. The price at which cross border subsidiaries trade impacts the distribution of profit across those jurisdictions, and therefore the tax which is payable in the jurisdiction where each subsidiary is based. Recently, some companies have adopted convoluted tax strategies that move profits from higher-tax jurisdictions to lower tax ones. As a result, the tax base of the higher-tax jurisdictions is reduced. This is not conducive to governments in the higher-tax jurisdictions that are seeking to recover their debts. Google and Amazon helped shine a light on this problem a few years ago, being criticised by the popular press for not paying what is considered a fair level of tax. With media interest not waning, “anti-avoidance” legislation, commonly referred to as the “Google Tax,” has been enacted by certain jurisdictions to help prevent questionable transfer pricing policies. Many household names are beneficiaries of taxpayers’ support in the UK now. Any suspicion that these companies are trying to minimise tax liabilities would be damaging to corporate reputations, with financial penalties also a possibility. Companies are therefore going to have to walk a tightrope of: a) balancing the need to service their own debts (which have increased due to the pandemic); b) meeting the fair tax obligations of multiple governments; and c) fulfilling their fiduciary duty to their shareholders (who they ultimately owe responsibility to, in order to act in their best interest). Transfer pricing tips Businesses need to be prepared to defend their transfer pricing positions, demonstrating that their calculations are watertight. To achieve it, the following tips are highly recommended. Excel is not your friend — abandon your dependence on it, or at the very least, standardise in it Excel is still used widely to manage operational transfer pricing and the associated calculations. Individuals often create custom calculations that cannot be standardised across teams, which encourages siloed working and inconsistencies. It is also manually intensive, enabling more room for human error. An integrated transfer pricing solution will centralise and standardise your core business processes, data and calculations, helping you form a consistent financial narrative. Without it, defending a transfer pricing policy becomes so much more difficult. Check the policies first, not the figures Getting bogged down in the detail can waste a lot of time, especially when worrying about individual adjustments between entity A and entity B. A better way is to review how the numbers align to your organisation’s policies, investigate the areas that diverge, and ensure everything is supported by the right documentation. Data science can help Tax authorities have data science professionals working on models to identify outliers when it comes to the numbers booked on tax returns. As data science becomes more widely adopted, transfer pricing policies can also be scrutinised using new models, developed by the tax authorities. Giving your team the right tools to help understand these models makes it easier to provide tax authorities with what they need, should your policy get challenged. Under the Base Erosion and Profit Shifting (BEPS) initiative, companies already submit a breakdown of the financial and tax position of the organisation by country, as well as tax return data. Tax authorities—in the future—could take this data and combine it with previous tax returns submitted by any company. With a data model that blends BEPS data with tax return data, they will be able to identify organisations taking a more aggressive stance around their global tax strategy, especially when looking at historical precedent. Increase confidence with a documented QA’d system We would recommend leaving Excel, moving to a quality assured system that automates the manually intensive parts of the transfer pricing process. These systems accurately collect and organise transfer pricing data, identify gaps in targeted profitability, and enable you to make corrections before closing the books. That way, you can use the time you save to take a step back so you can see the wider policy picture, rather than digging into the weeds of the numbers. Over the next few years, we will discover how governments intend to collect taxes due to help decrease their debts. If they take a more aggressive stance with multinationals, with BEPS helping to aid enforcement, transfer pricing policies could come under a lot more scrutiny. As businesses get back on their feet and survey the changing market, having a watertight and defendable transfer pricing position is critical to demonstrate transparency, protecting corporate reputations in the future. Richard Sampson is SVP of EMEA at Insightsoftware, a global provider of financial reporting solutions with more than 25,000 customers worldwide.