'Stormy seas’ forecast for transfer pricing

20 September 2006

'Stormy seas’ forecast for transfer pricing

Survey shows tax authorities converging on principles, diverging on implementation

Multinational companies are facing an increasingly complex and adversarial transfer pricing environment, according to a recent survey of more than 30 countries’ revenue authorities conducted by Ernst & Young.

Just launched globally, Tax Authority Interviews: Perspectives, Interpretations and Regulatory Changes is the third installment of Ernst & Young’s 2005/2006 Transfer Pricing survey. It indicates that while authorities are broadly agreeing on transfer pricing principles, they are adopting different approaches to applying these principles.

In the two years since the previous survey, tax authorities around the world have become better informed and prepared than ever before, and they are also under more pressure to deliver revenue ‘gains’ from their anti-tax-avoidance efforts.

Key findings from the survey include:

- A ‘new wave’ of countries including China, Colombia, Israel and Turkey are entering the transfer pricing enforcement field, while the ‘old guard’ – countries such as Canada, New Zealand and the UK with established transfer pricing regimes – are stepping up resources, levels of sophistication and focus in their transfer pricing efforts.

- Three significant trends emerged about tax authorities around the world that are important for multinationals to consider:
- They are more knowledgeable and attentive
- They view global tax positions, so corporate activity in one country may have implications throughout the organisation
- Transfer pricing implementation and penalties vary, but all countries are becoming more intensely focused on transfer pricing policy and compliance.

In New Zealand there continues to be a lot of audit activity focusing on loss-making companies, management service fees, royalties, interest rates, guarantee fees and limited risk conversions, says Matthew Andrew, Tax Director with Ernst & Young in New Zealand.

“The Inland Revenue is definitely focusing on transfer pricing. Audit activity has significantly increased in the last twelve to eighteen months. The scrutiny is greater than ever.

“New Zealand-based multinational enterprises should be aware that the Inland Revenue scrutinizes intercompany transactions both from the inbound and outbound perspectives. The Inland Revenue is concerned that many enterprises may not be sufficiently charging for the services, financing and intangible property provided to their offshore operations,” says Matthew Andrew. “Last week’s settlement in the U.S. between the Internal Revenue Service and GlaxoSmithKline Holdings (Americas) Inc for US$3.4 billion is an example of how seriously transfer pricing should be treated.”

Leslie Prescott-Haar says the more rigorous stance is consistent with approaches being taken in other mature, established transfer pricing jurisdictions such as Australia, Canada, US and Japan.

"Transfer pricing continues to be the most important international tax issue facing New Zealand multinational enterprises. New Zealand companies today must assume that tax authorities everywhere will have a complete picture of their global tax position, and that any steps they take in one country will have implications across their entire operation,” advises Leslie Prescott-Haar.

The full report can be downloaded from Ernst & Young’s website: www.ey.com/nz

ENDS

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