Multinational Tax Challenges: Can your Transfer Pricing Withstand Scrutiny?April 29, 2014
Foreign countries imposing restrictive standards for permissible transfer pricing, and IRS increasing enforcement.
Multinational corporations have long attempted to minimize their global tax liability by allocating income between divisions through transfer pricing policies. In recent years, though, foreign countries have imposed more restrictive standards for permissible transfer pricing, and the IRS has stepped up its enforcement. With tax revenues in many countries still at diminished levels, this heightened scrutiny is likely to continue.
Foreign countries are increasingly developing tighter regulations to ensure that multinationals’ losses are due to legitimate business reasons and accurate transfer pricing adjustments. The Organisation for Economic Co-operation and Development (OECD) — which includes the United States, the European Union, Canada, and most of the world — has released proposed guidance for taxing authorities on transfer pricing documentation requirements. The guidance, expected to be finalized by June 2014, is generally intended to enhance transparency to taxing authorities and may cause an increase in multinationals’ reporting burden.
At the same time, transfer pricing has become a tier one issue, causing the IRS to launch more audits in this area, which have resulted in adjustments to income. The IRS recently released a “Transfer Pricing Audit Roadmap” to guide its dedicated team of transfer pricing specialists and is expanding its focus to capture more midsize taxpayers, including those with assets as low as $10 million.
Together, these developments mean that a transfer pricing policy must be re-evaluated to ensure current compliance. At the very least, additional documentation might be required to establish that intracompany transfers satisfy the arm’s-length standard for pricing between related parties.
Multinationals need to take a proactive approach to their transfer pricing policies to get ahead of the compliance and tax planning curves. Overall effective tax rate minimization strategies should consider net operating losses, excess foreign tax credits and intangible property migration, as well as selecting the appropriate pricing methods for transfer pricing studies. The policies will also need to be re-evaluated on a regular basis to keep up with evolving requirements around the globe.
If you’d like help navigating transfer pricing issues, please contact the KLR International Tax Services Team.