The OECD’s Base Erosion and Profit Shifting (BEPS) initiative is driving the biggest shake-up in international taxation for a generation. More than a 100 countries have pledged to implement at least some of the BEPS recommendations but this will inevitably lead to an uneven approach globally. The 2018 edition of Grant Thornton's global transfer pricing guide is a resource for corporate taxation and finance departments that are having to navigate and manage some of these disruptive changes. These four questions will help focus on the key issues.
1. Does transfer pricing reflect the business's economic substance?
Demonstrating that the business and its value creation are reflected by its transfer pricing activities is an important element of global tax reforms. However this can be complex. The Grant Thornton Transfer pricing guide 2018 notes: “Substance can appear quite straightforward in areas such as manufacturing, where it’s obvious that a factory or warehouse exists. However, what we refer to here are the ‘significant people functions’ – where are the people controlling the important risks in the business, such as new product development, or procurement.” But transfer pricing is more complex in areas such as the creation and development of intellectual property and other intangible assets.
2. Can you justify your transfer pricing approach?
One of the consequences of the BEPS initiative is that many countries could argue that corporate taxes should be paid in their jurisdiction. Although BEPS is meant to reduce the risk of double taxation, it could lead to an increase in the risk of compliance lapses, disputes and double taxation disputes. Much will depend on how the rules are implemented and enforced in different jurisdictions and it will be crucial for companies to explain clearly why and where they pay tax and transfer pricing. Grant Thornton's report adds: “It is also important to identify transactions that tax authorities could focus on as a basis for transfer pricing audit and additional tax demands.”
3. Will your documentation withstand examination?
Country-by-country reporting means that authorities will be able to compare documentation such as transaction data, which, according to Grant Thornton's guide, “provides authorities with a revealing blueprint of profit drivers, intercompany financing and pricing policies within your business”. Authorities will also be able to analyse data such as the size of workforce in each country or business unit, which should correspond to taxes payable.
4. Are you ready for patchwork BEPS?
The BEPS recommendations will be adopted by each country at differing rates and at the discretion of each jurisdiction, which could result in a new but varied transfer pricing landscape. Grant Thornton notes: “The resulting inconsistencies are creating a complex patchwork of local rules. Some countries are applying high penalties for missing locally-set deadlines for notifications. This approach is considered by many to be against the spirit of the BEPS project (which was intended to improve coherence and consistency as well as transparency) and it can look very like an attempt to raise revenues.”
CTMfile take: The 2018 edition of the annual Grant Thornton global transfer pricing guide provides a lot of detail and info to help finance and tax professionals steer through these difficult waters, including a jurisdiction-by-jurisdiction overview of transfer pricing rules in place, how these are likely to be affected by BEPS and when changes are likely to be introduced.
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