The realities of the business environment in which multinational groups operate today consist of a shrinking domestic market and an ongoing pressure to reduce costs. In addition, multinational groups are also faced with the different expectations of different stakeholders and the increased disclosure requirements of financial data. It seems that many multinational groups may have risk management structures in place, but often lack proper control mechanisms.
Transfer pricing governance needs to be based on the strategic goals and aims of transfer pricing, and multinational groups must consider how to manage their transfer pricing risks and processes to achieve the these goals. It is important to identify individuals within a multinational group who understand transfer pricing and ensure that there is constant communication between these individuals.
At the same time, the management of multinational groups needs to handle the expectations of various stakeholders such as shareholders, banks, tax authorities, auditors and the general public. While shareholders expect a high net profit, public society and tax authorities expect companies to pay their fair share of taxes, while banks also expect proper transparency and auditors expect reasonable tax assurance.
Multinational groups need to understand that contemporaneous documentation is an essential requirement for transfer pricing compliance, that centralised business structures and the use of hybrid entities are being looked at intensely by all tax authorities and that audit trails have to be maintained at the time of preparing the transfer pricing policy.
Multinational groups need to increase the efficiency of their transfer pricing compliance and manage their risks by evaluating their existing transfer pricing processes, determine the best practices required and develop an action plan to bridge any gaps. Better transparency will affect the tax planning of employees and improve communications with all stakeholders.
Multinational groups also need to ensure that their supply chain does not result in Base Erosion and Profit Shifting (BEPS). This may require the preparation of a detailed transfer pricing policy. In striving for transparency, it is important to control both the channel of communication as well as the level of information shared, supported by a corporate governance model.
To avoid pitfalls with its transfer pricing position, multinational groups need to assess whether their transfer pricing policies and practices are:
- founded on sound economic principles and supported by a detailed analysis of the specific facts and circumstances
- ensure that related party transactions are taxed in accordance with functions and risks undertaken by the various parties
- flexible enough to be amended when new transactions arise or corrective actions need to be taken
- appropriate, given the functions performed, the risks assumed and the assets employed
- reviewed on a regular basis to ensure the appropriateness of the pricing policies and practices, taking into account recent changes in the business
- supported by legal agreements to allow for the proper management of both operational and tax compliance
Multinational groups should undertake a transfer pricing risk management assessment to review their specific business circumstances, evaluate their transfer pricing risk exposure and to mitigate and manage those risks, both for previous years of assessment as well as for future years of assessment.