What was the most significant development in (the EMEA region's TP practice in the last 12 months) your region/jurisdiction's transfer pricing practice in the past 12 months?
The most significant development, which indeed is ongoing, is the substantial increase in the information available to tax authorities from a number of sources, combined with a similar increase in the resources they deploy to analyse such information. Such sources of information and data would include those from recently introduced reporting requirements, both on a group level (such as CBC data) and locally (eg. additional reporting in individual countries over and above documentation requirements); from enhanced and expanded interrogation techniques, using technology, often on a real-time basis; and from exchanges of information with other tax authorities.
What was the most notable effect of that change?
The above has clearly increased the depth and granularity of analysis and challenge by tax authorities. One particular aspect of this is general moves from requesting information and support for positions from taxpayers to directly sourcing such information and arriving at an interpretation from this. Another, driven by the significant expansion of information available regarding the broader multinational group, is that tax authorities are much slower to accept a narrower view based on a single country perspective, as opposed to understanding the interaction with, and relative levels of earning compared to, the broader global organisation.
Where is the market moving in this practice area?
Tax audits are becoming increasingly challenging in EMEA. The proximity of countries and collaboration within the EU has also led to tax authorities exchanging information perhaps more readily than in some other regions. Tax authorities in EMEA also tend to have greater use of computer interrogation techniques, and we see the level of detail that tax authorities ask for can be deeper than elsewhere. There are often additional issues such as State Aid (in the EU), challenges on the core deductibility of costs, and withholding tax questions – although these are not exclusive to EMEA, it is increasingly difficult to look at transfer pricing issues in isolation. In the past, companies could seek help from a lawyer to help with a controversy challenge – but with today's complexity, you need a broader skill set including data interrogation, technology, broader tax law, how rules differ between geographies, and much more.
The balance between planning, versus interaction with and reporting to tax authorities, is tipping firmly towards the latter. Companies are facing ever-increasing pressure from tax authorities for detail in reporting. This ultimately requires resources and technology to enable responding in an efficient way; and has heavy cost and time implications. Business "life events" such as Mergers and Acquisitions (M&A), rationalization etc., requires planning. What there is less of in the market is business change where tax is a key driver in itself, which is a continuing trend.
Another trend we see is real-time reporting in the evolution of digitalization of tax. Tax authorities are moving towards being able to see the data directly in a company's systems rather than companies having to file accounts, returns and reports.
What kind of impact will this have on your work?
The increase in reporting requirements from tax authorities means that our use of technology becomes more important, as well as our increasing breadth of skills, by joining up with transfer pricing practices within (and outside of) our region. The trend towards real-time reporting also implies that integrating technical (transfer pricing) knowledge with technology and advice on how to operationalize what's in a client's system, are becoming more important.
Do you anticipate any significant legislative changes in the future with a material impact on transfer pricing in your region?
On a macro level, the main point is that the OECD proposals on the "digital" aspect have become broader, with a reach beyond simply companies with digital business models. They are looking at elements relating to, for example, marketing intangibles, where the solutions could fall outside of the traditional arm's length standard of transfer pricing. It would be a substantial change to working practices having to consider the elements both within and outside of the arm's length standard, and how they all fit together without creating double taxation or additional uncertainty.
On the digital side, and more broadly, individual countries are introducing their own rules in addition to evolving OECD guidelines. Some of these stretch transfer pricing in terms of local legislation, such as the diverted profits tax and the proposed digital tax in the UK, again going beyond the arm's length standard, which has been the basis for transfer pricing for a long time. The other main ongoing area of work is on transfer pricing in relation to financing – the changes and guidance in this area, that have been proposed in initial drafts, are likely to have implications for the vast majority of companies, and require specialist knowledge and skills.
If these come into force, how will the industry look in the future?
The balance between the use of technology and the need for technology skills is likely to increase materially. If we consider the issues of moving beyond the arm's length standard, the risks of double taxation are likely to be significant, leading to the need to redesign current transfer pricing policies in relatively short time frames, and to inevitable further challenges in the controversy area.
How would you describe the transfer pricing controversy landscape in your region/jurisdiction?
The transfer pricing controversy landscape in EMEA is challenging. As mentioned above, we've seen increasing pressure from tax authorities to provide more detail more quickly. A recent Deloitte survey* also confirmed these trends: a big increase in resources, and therefore capabilities, within countries' tax authorities; more intrusiveness in data requests (including direct access), and an increase in the interaction between different countries' tax authorities. In the International Compliance Assurance Programme (ICAP) programme, tax authorities collaborate to provide more clarity and views on risk. The positive effect is greater comfort to companies, but it is potentially outweighed by other developments that increase the risk of double taxation.
Do you expect transfer pricing procedures in your region to move towards common standards or diverge in the future?
The OECD has been working towards standardization in the last four or five years, and made substantial changes to the guidelines that underpin transfer pricing rules. It has not yet led to consistency in how tax authorities implement these, even in some of the more basic elements such as reporting and documentation requirements. While there is a genuine desire from the OECD to have consistency, achieving this – given the pace at which the OECD is working – is very challenging. Recent history suggests that countries are likely to implement these in a way they feel most appropriate locally, and often go beyond OECD requirements, which may lead to a more challenging environment for taxpayers.
Is the global drive towards regulation going to affect TP practice? If yes, in which areas?
Undoubtedly, and we will need more technical skills to address the various additional challenges. The demands on transfer pricing practices have grown materially with the continual changes. With ongoing changes, I envisage that the pressure on Deloitte's TP practices will continue. We will need to increase our use of technology and depth and breadth of skills on a global basis. Fortunately, the member firm consolidation makes that a little easier!
* Survey: Trends in Transfer Pricing – Global Research Bulletin, August 2018
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