Closing The Gap on BEPS: Current Efforts To Update Tax Codes In The Era Of Transfer Pricing

Transfer pricing is a complex issue currently affecting multinational enterprises (MNEs) and tax authorities of both developed and developing nations. The OECD, EU, UN, IRS and others are all preparing adjustments of tax schemes to improve clarity, ease dispute resolution, and provide for analysis and penalties for transfer mispricing. In increasing the number of both transfer pricing audits and adjustments in recent years, governments have had to use significant amounts of tax agency resources, incurring substantial costs in large scale procedures analyzing billions of dollars in assets and transactions. The difficulty in doing so has encouraged governments to create collaborative tax measures to bolster their spread of enforcement powers while minimizing use of tax agency time and resources.

On the other side, MNE’s have also raised their attention to transfer pricing in recent years in response to an increase in transfer pricing audits. Current estimates suggest that at least 60% of international transactions occur within MNE’s as opposed to between unrelated parties, making up a substantial amount of international trade that before now has been relatively unexamined. A $3.4 Billion dollar settlement from GlaxoSmithKline in 2006 was the largest settlement and IRS history and an alert to other MNE’s that the gap between transfer pricing and its regulation was closing. In a 2015 Survey of CEO’s conducted by PriceWaterhouseCoopers, 67% of respondents said that “an internationally competitive and efficient tax system” was high on their wish lists, and for good reason.

While MNE’s are always aiming to minimize tax payments, transfer pricing audits and adjustments can be disastrously expensive in terms of resources used, penalty size and public perception. Thus it is more important to many MNE’s that their tax positions be relatively certain in their nature as opposed to aggressively minimizing tax liability at an increasing risk of an audit. Such aggressive stances are noted under FASB ASC Topic 740 as an uncertain tax position. In doing so companies must list the form under which the position exists, a T for transfer pricing, and can only recognize benefit of that which is more likely than not to be sustained at the largest amount that is more than 50% likely to be realized. This transparency is only the beginning as IRC § 482 allows the IRS to shift income or assets between related parties if it determines that internal transactions were not conducted at arm’s length.

At the international level both developing and developed countries are actively preparing unification in the handling of this issue. In January of 2016 the European Union Council (EC) released a draft of its Anti Tax Avoidance Package (ATAP) in an effort to create solidarity in tax enforcement. Many of its components come from OECD deliverables and in some cases surpass those requirements. Proper implementation of these new schemes aim to eliminate the “arm’s length” principle in exchange for value-creation based apportionment with country-by-country disclosure. The proposed regulations expose and punish aggressive profit shifting MNE’s and simplify procedures for transparent entities. Many reporting requirements under proposed regulations will be standardized so that this extensive reporting saves time, effort and money for MNE reporting teams. The template for dispute resolution will also save governments and MNE’s a great deal of time and litigation while preventing a competition between auditing governments for available revenues. The finalization and ratification of the proposed regulations promises to create a worldwide interconnected tax structure for MNE’s that is easier to use and harder to abuse.

Robert Gyemant

Senior Tax Advisor to multinational Fortune 500 companies executive management teams on a wide range of tax and legal matters including domestic and international tax expertise, transfer pricing, cross-border transactions, cross-border controversies,ASC740 tax provision,flows of tax information into domestic and foreign business units, intercompany contracts, resolution of SOX issues and internal controls best practices.
Currently available for interim and full-time tax projects nationally. Please send a message to me through TaxConnections and I will get back to you.

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