Take care with transfer pricing

Media Release
21 November 2005

Take care with transfer pricing, warns Ernst & Young

New Zealand companies undertaking international business changes are encouraged to consider the tax consequences, both risks and opportunities of these changes, according to Ernst & Young New Zealand's National Director of Transfer Pricing Leslie Prescott-Haar.

Ms Prescott-Haar's advice follows the release of the Global Transfer Pricing Trends, Practice and Analysis, the second of four Ernst & Young 2005-2006 Global Transfer Pricing Surveys, polling 476 companies in 22 countries.

Governments are also intensifying attempts to obtain their "fair share"of multinationals' taxable income. The survey shows more countries are taking action on transfer pricing, including imposition of documentation requirements and a focus on transfer pricing audits, making transfer pricing risk management a dominant issue for multinational corporations.

Transfer pricing involves the price at which transactions between units of multinational companies take place, including inter-company transfers of goods, property, intangible assets, services, loans, leases etc.

Almost two-thirds of the companies surveyed have been examined by tax authorities in the past three years. Respondents disclosed that more than 40 percent of examinations resulted in adjustments by tax authorities.

"Worldwide, companies are recognising the importance of transfer pricing and dedicating more resources to understanding, planning and documenting their inter-company pricing," says Ms Prescott-Haar.

"Yet New Zealand companies are not all following suit. All too often New Zealand companies do not adequately consider transfer pricing when they're undertaking international business expansion or change initiatives, and only seek advice after the fact - or when a tax authority knocks on their door. There is definitely room for New Zealand companies to improve their management of transfer pricing opportunities and risks."

The Ernst & Young Survey points to an increasingly diverse investment landscape: survey respondents are investing globally in new markets, stimulated by emerging economies in Asia, Central Europe and elsewhere. New Zealand companies investing offshore often delay implementation of transfer pricing planning and risk management. Opportunities are lost and disputes with tax authorities can arise as a result. For instance, many countries in the Asian region, including Australia, China and India, have or will shortly have transfer pricing legislation requiring contemporaneous documentation to be prepared by companies in support of a company's transactions.

Ms Prescott-Haar also warns that transfer pricing is firmly in the sights of Australian and New Zealand tax authorities, with an increasing number of companies under audit scrutiny on both sides of the Tasman. Audit activity is also increasing in the rest of the Asian region as tax authorities gain experience and the backing of more robust legislation.

"There has been an obvious increase in the IRD's transfer pricing activity in the past year or so, consistent with the expansion of its transfer pricing group and a high level of interaction with the ATO," says Ms Prescott-Haar.

"We have noticed increased IRD activity in respect of the risk assessments and requests to review transfer pricing documentation in the current calendar year."

31% of Australia/New Zealand parent companies surveyed have been notified by the tax authorities with a request to view transfer pricing documentation outside of an audit. The ATO in particular were found to be more active in their review of transfer pricing documentation than almost any other tax authority in the world. This is especially important to New Zealand companies as Australia is generally the first port of call in a company's international expansion plans.

Ms Prescott-Haar says companies should consider the documentation of the transfer pricing as well as employing tools such as Advanced Pricing Agreements (APAs) to manage transfer pricing risk in appropriate circumstances. APAs are an agreement with one or more tax authority that allows companies to apply an agreed transfer pricing method, thereby eliminating risks on the transactions.

The survey shows 67% of Australian respondents who used a bilateral APA obtained the APA within 12 months, a significantly better result than the survey's global average. Ms Prescott-Haar says the timeframe is similar in New Zealand, most likely reflecting the well-organised APA programmes run by both the ATO and the IRD.

Key findings of the survey also include:
- Half of the Australasian companies surveyed have undertaken significant international business change initiatives in the last three years. This was substantially lower than for the total surveyed companies in general (71%), and for USA companies (90%) in particular.
- Thirty-eight percent of respondents list transfer pricing as the most important item on the agendas of their corporate tax directors.
- Approximately 70 percent of respondents believe transfer pricing documentation is more important today than two years ago, as reported by the previous Ernst & Young transfer pricing survey.
- An increased level of transfer pricing audit activity, with 65 percent of parent companies and 59 percent of subsidiaries having experienced examinations of their transfer prices since 2001. More than 40 percent of known outcomes involved adjustments.
- Respondents reported increased levels of financing transactions. In this regard the IRD have also announced a review of the transfer pricing of finance transactions will be commencing in 2006.
- Technology, intellectual property and financial transactions are most susceptible to audit risk.

- ENDS -

About the Ernst & Young 2005-2006 Global Transfer Pricing Surveys
Global Transfer Pricing Trends, Practice and Analysis, the second of four Ernst & Young 2005-2006 Global Transfer Pricing Surveys, conducted by Consensus Research International, polled 348 multinational parent companies and 128 subsidiary corporations in 22 countries. The first installment of the 2005 Survey comprised web-based surveys of over 100 financial global financial institutions. Copies of this first installment can be found at www.ey.com/transferpricingsurvey. The final two installments will be published in the first two quarters of 2006.

About Ernst & Young
Ernst & Young, a global leader in professional services, is committed to restoring the public's trust in professional services firms and in the quality of financial reporting. Its 106,000 people in 140 countries pursue the highest levels of integrity, quality, and professionalism in providing a range of sophisticated services centered on our core competencies of auditing, accounting, tax, and transactions. Further information about Ernst & Young and its approach to a variety of business issues can be found at www.ey.com/perspectives. Ernst & Young refers to all the members of the global Ernst & Young organization.

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