Be proactive in transfer pricing

PUBLISHED : Monday, 20 September, 2010, 12:00am
UPDATED : Monday, 20 September, 2010, 12:00am

As tax authorities around the world zoom in on transfer pricing issues, leading accounting firms recommend that companies in the Asia-Pacific region move away from compliance-based transfer pricing strategies towards a more holistic approach.

Kari Pahlman, KPMG's Hong Kong-based Asia-Pacific leader for global transfer pricing services, says that as economic development in the region moves towards higher value functions and more complex transactions, with consumer markets continuing to develop, companies need to pay more attention to the way they approach transfer pricing.

Transfer pricing involves selling and buying products and services between subsidiaries in a multinational company.

Pahlman says transfer pricing audits are increasingly common, as authorities develop greater experience in analysing transfer prices as they seek to protect their respective tax bases. He says as multinational companies continue to increase their presence and profits in Asia, issues surrounding transfer pricing are becoming more important in their business operations.

In many countries and jurisdictions, including Hong Kong, tax laws put a check on the potential loss of revenue to governments involving the cross-border transactions involving companies within the same group.

Companies operating internationally are discovering that their transfer pricing position may face challenges from one tax authority, even when that position is accepted by other tax authorities.

For example, over the past two years, the mainland has issued several transfer pricing regulations and is considered one of the most robust in examining transfer pricing structures.

In the United States and Europe, Pahlman says fiscal deficits and budget shortfalls are prompting governments to tightening controls over cross-border transactions.

'Even if and when the global economy picks up, the trend we are seeing towards authorities scrutinising transfer pricing is likely to continue. Over the next five to 10 years, Asia is likely to be at the forefront of transfer pricing issues,' Pahlman says.

To avoid any value destruction caused by transfer pricing problems, Pahlman suggests companies establish a comprehensive transfer pricing management system.

This should include planning a transfer pricing strategy, extensive implementation of the policies through internal controls and systems, and risk management through documentation and selective use of advance pricing agreements. These are agreements made in advance between taxpayers and revenue authorities on the prices and the tax that can be applied to a particular type of transaction.

A transfer pricing management system should also be re-evaluated on a continuing basis to respond to changes in business operations.

'Managing transfer pricing should not be considered a reactive, one-off event where a taxpayer just responds to documentation requirements. Given the trends in regulation and enforcement, any failure to address transfer pricing on a more holistic basis is likely to give tax authorities an upper hand in the event of an investigation or dispute, and could expose companies to material risks. Reactive strategies typically also fail to deliver any of the potential benefits of more proactive transfer pricing approaches, such as effective global tax rate management,' Pahlman says.

'Companies that are looking to actively create and preserve shareholder value, should move towards adopting more proactive and holistic transfer pricing strategies.'