Economic uncertainty, tax and regulatory reform: faced with these complex challenges, tax directors need to take forward-thinking approaches to re-designing their operations and re-shaping their long-term strategies in response.

“From transfer pricing audits, to short-term business travelers, to challenges of offshore holding structures, tax authorities are looking at taxpayers’ cross-border activities to shore-up their government’s finances and prevent revenue leakage,” says Warrick Cleine, KPMG’s Head of Tax for Asia Pacific.

“Businesses in the region are increasingly challenged to keep pace with the speed and complexity of change.”

Cleine notes that even though a company’s transfer prices may be sound, the tax authority’s field team, particularly in Asia’s newer markets, may lack technical experience, which can complicate audits and create disputes.

The Asia Pacific region is already seeing higher levels of scrutiny over transfer prices. In China, for example, although the overall number of cases has remained similar over the past five years, the average value of each adjustment has risen rapidly, so that the total value of adjustments has increased 354 percent (from less than RMB500 million in 2005 to over RMB2 billion in 2009).

According to KPMG tax professionals, there are signs that this trend will accelerate.

The increase in transfer pricing regulations within the Asia Pacific region and the corresponding documentation has provided tax authorities with a wealth of data they can use to select audit targets.

Thanks to database technology, tax authorities are able to use this information to target industries, groups or even companies with abnormal results and thus focus their search on transactions within these areas.