What have been the most significant developments in transfer pricing compliance in the past 12 months?
There have been a number of significant developments as new transfer pricing rules are being introduced in different countries continually (countries such as Kazakhstan, Tunisia, Thailand, Hong Kong, and Saudi Arabia have introduced new rules while Poland and Singapore have changed their rules). Many countries now have documentation filing requirements (rather than just requiring documentation be in place) – whether this be the full local file or a form containing certain detail, and many local deadlines are significantly earlier than that of the parent company.
From a global perspective, the OECD's "Handbook on Effective Tax Risk Assessment" was introduced in September 2017, which includes 19 factors that determine risk from analyzing data in a group's country-by-country report. We can expect tax authorities to use these factors to help them interpret the data and raise questions leading to tax audits. From a tax audit perspective, we have also seen an upwards trend in the level of scrutiny of written documentation by tax authorities. The increase in collaboration between tax authorities and information sharing means they are looking at the master file and local file in the context of what they are hearing elsewhere, and challenging some of the detail included in the local file where it is inconsistent with what has been reported elsewhere. However, tax authorities are also challenging where the documentation does not accurately set out what is happening in the local country. In the UK, the tax authority has noted in its write-up of the Diverted Profits compliance facility that a transfer pricing risk factor is a generically prepared functional analysis, without sufficient determination as to whether UK facts and circumstances are sufficiently comparable.
What are the most notable effects of those changes?
There is a continued trend to managing transfer pricing compliance centrally in order to improve efficiency and consistency, and have a coordinated approach to managing the risk coming from analysis of data and scrutiny of the write-ups provided. However, there is also a need to have sufficient local input to make certain that the detail reflects local nuances. The impact of the continued introduction of new rules and deadlines was brought out in a recent Deloitte survey, which highlighted a need for project management – meeting deadlines, requirements, and coordinating better between files across countries. Project management skills are now required to manage the additional compliance requirements alongside the documentation (such as forms and notifications) in certain countries.
Where is the market moving in this practice area?
We are seeing a move towards more project management to take into consideration hard and soft deadlines, such as lodging/submission of forms and files versus the preparation of reports. The centralization trend is continuing but with a tilt back to appropriate localization, and defence-ready, more detailed local files. Businesses are using data analytic tools to scrutinize their own country-by-country reports for risk to anticipate potential tax authority challenges.
Do you anticipate any significant legislative changes in the future with a material impact on transfer pricing in your practice area?
The longer-term trend is likely to be more real-time reporting. Tax authorities are likely to be looking at testing the arm's length nature of transactions during the year, rather than just what is reported after the end of the year. This is likely to change the format of transfer pricing documentation. There is still likely to be a need to set out the detail on business operations, such as the value chain and analysis of comparability factors to implement the correct selection of transfer pricing method, but there is likely to be less focus on documenting and testing results.
How can companies address these changes?
It is important to develop a strategy upfront, which takes into consideration the local rules and nuances. Scope the project carefully before starting, and consider the various levels of reports that may be required. A balance is needed between centralization vs localization strategy. Companies also need to consider industry detail, rather than generic transaction-based reports. Data analytics and assessments can help to:
- Identify anomalies and mitigate risk;
- Focus efforts on the areas requiring risk management;
- Drive efficiency and consistency (but with the expectation that some tailoring of modules or inclusion of local information would be needed);
- Enable efficient tailoring to common materials using technology.
In future, we expect greater confidence that systems will produce the right numbers, with less reliance on year-end corrections, which means a greater focus on how transfer pricing policies are operated during the year.
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