Achieving transfer pricing certainty

IN BRIEF:

• Results from the 2024 International Tax and Transfer Pricing Survey highlighted the need for robust transfer pricing policies given new international tax risks.

• Among pressing concerns include effective tax rate stability, particularly with the implementation of the Base Erosion and Profit Shifting (BEPS) Pillar Two global minimum tax, changes in local and international tax policies, and technological advancements.

• To solidify their positions, tax and transfer pricing professionals should decrease risk by centering processes around standard data, concretize dispute resolution mechanisms, and engage with the C-Suite.

Global tax reforms are leading to double taxation risks, which are significantly altering businesses’ approaches to transfer pricing certainty and operational transfer pricing needs. Other key concerns include inflation, increased focus on enforcement by tax authorities, environmental, social, and governance (ESG) pressures, advancements in transfer pricing related technologies, such as generative artificial intelligence (GenAI) and transfer pricing dispute resolution tools, and changes in supply chain.

EY recently released the results of the 2024 International Tax and Transfer Pricing Survey, which sampled 1,000 senior tax and finance professionals from large companies in 47 jurisdictions across 19 industries. The survey, which was conducted by an independent provider, highlighted the increasing need for businesses to implement robust transfer pricing policies given new international tax risks.

This article will tackle the concerns, challenges, and considerations that were identified by surveyed tax and finance professionals.

THE ROLE OF TRANSFER PRICINGHistorically, transfer pricing has followed a linear approach that comprises planning, implementation, compliance, and controversy. With the changing landscape, tax and transfer pricing professionals need to engage more strategically with the broader business, considering the rapid increase in double taxation risks and external pressures.

Tax audits are expected to increase and intensify, with transfer pricing identified as a top risk area. Tax authorities are now going beyond traditional, functional interviews by processing more details about taxpayers’ global operations, including how tax obligations and business activities align in specific jurisdictions.

The data accessed by tax authorities in this evolving tax controversy landscape can be utilized by GenAI and related technologies, allowing them to conduct the audit and process data more effectively. Public regulatory filings, social media profiles, news articles and intellectual property registrations are some sources of information that tax authorities can analyze to evaluate risks and challenge a taxpayer’s position.

In the Philippines, the Bureau of Internal Revenue (BIR) identified the creation of a Transfer Pricing Office as a priority program for 2024. The new office will be expected to monitor compliance with transfer pricing documentation requirements, including the preparation and maintenance of local files, master files, and country-by-country reports (CbCR). These will be done pursuant to the minimum standards of the BEPS Action Plans as basis for strategic decision making and managing tax compliance risks. Consequently, the BIR will be keeping a keen eye on cross-border transactions to ensure fair and accurate allocation of costs and profits.

STANDARDIZING DATA TO MANAGE TAX CONTROVERSYTraditional transfer pricing operations are labor-intensive, especially those focused on compliance. Reconciliations and adjustments should ensure that intercompany pricing policy continuously occurs throughout the year, and not just by the end. Gathering the required data for fact-finding, such as financials, taxes, and supply chain information for open years, becomes a challenge when sourced from multiple systems and jurisdictions. This is particularly evident in tax audit cases because taxpayers are expected to respond within a limited period.

Increased technology adoption can enable traditional operations and compliance functions in this changing landscape. Taxpayers must plan ahead to harness the power of data, systems, and technology. Investing in data strategy system improvement and advanced operational transfer pricing technology or partnering with a service provider who has built these capabilities can facilitate transfer pricing certainty.

Likewise, tax and transfer pricing professionals may resort to GenAI tools to align the group’s transfer pricing policies while identifying and addressing tax risks. This will revolutionize how professionals prepare, analyze, and present data to ensure that their positions are clear, defensible, and easily understood. With the rollout of Pillar Two and disclosure of CbCR in a number of tax jurisdictions, businesses must standardize their internal data to efficiently manage tax authority controversy and Pillar Two calculations.

The Philippines has recently accepted the invitation from the Organization for Economic Co-operation and Development (OECD) to join the Inclusive Framework on BEPS, but the country has yet to see local adoption of the Pillar Two rules. To be proactive, tax and transfer pricing professionals should start standardizing their internal transfer pricing data.

TRANSFER PRICING CERTAINTY THROUGH DISPUTE RESOLUTION PROGRAMSTransfer pricing certainty can be realized through various factors, such as increasing interest in advance pricing agreements (APA), mutual agreement procedures, and other dispute resolution programs by tax administrations. In some tax jurisdictions, the International Compliance Assurance Program (ICAP) is considered a pre-filing and dispute resolution mechanism. Moreover, the ICAP coordinates between a multinational enterprise (MNE) group and multiple tax administrations through the effective use of transfer pricing documentation, including the MNE group’s CbCR to improve multilateral tax certainty.

In the Philippines, there have been discussions on the upcoming release of the APA Guidelines to fortify transfer pricing implementation. APA is a mechanism where the tax authority and the taxpayer would agree in advance on the appropriate set of criteria (e.g. transfer pricing method, comparables and appropriate adjustments) to ascertain the transfer prices of controlled transactions over a fixed period of time. Tax and transfer pricing professionals foresee that unilateral APAs will be useful to manage transfer pricing related controversy.

HOW CAN PROFESSIONALS PREPARE FOR THE NEW REALITY?Tax and transfer pricing professionals highlight escalating concerns regarding double taxation and broader tax and legislative changes, emphasizing the emergence of a new era where businesses are seeking more certainty in their transfer pricing positions.

Some measures that companies can take include: focusing on transfer pricing certainty, mapping out future and current dispute resolution mechanisms, centralize processes around standard data to decrease risk, prepare for increasing application of data to define the company’s transfer pricing approach. These measures, naturally, will require the cooperation and support of the company’s C-level executives.

REALIZING TRANSFER PRICING CERTAINTYTax and Finance departments should prioritize transfer pricing certainty through standardized data, modified processes, and technology adoption to facilitate dispute resolution. Tax and transfer pricing professionals should collaborate more closely with the C-suite in making business decisions to enhance certainty from the outset of any business changes and to effectively navigate the evolving regulatory environment.

Internally, tax and transfer pricing policies should align with the organization’s broader public image. Externally, pre-filing and dispute resolution programs should be considered.

Preparation is also key. Taxpayers that invest in modern transfer pricing approaches will be adequately equipped to engage with tax authorities in future controversies and better support their positions. Finally, tax and transfer pricing professionals must recalibrate and adapt their strategies in response to the changing global tax and economic landscape.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Ana Katrina C. De Jesus is a Tax Principal of SGV & Co.