The combination of increasingly complex supply chains and a sharper focus on transfer pricing on the part of tax authorities has led to an increase in transfer pricing controversy, finds KPMG in its new report A World in Transition: Managing the Transfer Pricing Implications of Complex Supply Chains. The publication focuses on three discrete types of supply chain issues: implications of the new OECD guidelines, multinational enterprise (MNE) supply chains, and controversy.
Covered in the report are issues that arise in the supply chains of MNCs, such as new developments in the relationship between customs and transfer pricing regulations. This issue is especially important in Asia, as many countries have high duty rate, leading to significant potential costs where companies are required to report different prices for transfer pricing and customs tax purposes. The report also looks at the options taxpayers have in resolving conflicts with tax authorities.
This rides on the broadening of the OECD’s scope of its Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations in July of 2010, which has changed its definition. In essence, a business restructuring can involve almost any substantive change in a business relationship.
The section on the new OECD Guidelines includes specific country perspectives on business restructuring concepts from: Australia, Belgium, Canada, China, Denmark, France, Germany, Italy, Japan, the Netherlands, Spain, the United States and the United Kingdom.
“The OECD Guidelines on Business Restructuring effectively treat a wide range of non-tax business decisions as transfer pricing issues,” says Steve Fortier, leader of KPMG’s Global Transfer Pricing Services. “In evaluating the implications of the new guidance on business restructuring, the key question is how local tax authorities will interpret it. The answer to this question will vary by tax authority and although we have some indication from early conversations that are reflected in this publication, it will continue to evolve.”
The report also focuses on several selected issues that arise in many MNEs supply chains specifically operating in Asia, including:
- the interaction between transfer pricing and customs, which is especially important in Asia due to relatively high duty rates
- centralized sourcing/procurement companies
- the treatment of location savings
- a recent training in China for State Administration of Taxation (SAT) officials on auto industry issues, which provides useful insight into how the SAT approaches certain key transfer pricing issues.
“European and American MNEs increasingly source from Asian suppliers and establish centralized purchasing functions in Asia to achieve business objectives. Depending on the purchasing centralization strategy, these restructurings could shift profits away from the US and European taxpayers, and American and European tax authorities may have concerns over the resulting lost tax revenue,” comments Fortier.
A further section of the report focuses on transfer pricing controversy, including a discussion of two new tools to help taxpayers resolve controversy – accelerated competent authority procedures (ACAP) and binding arbitration—as well as a discussion on navigating transfer pricing disputes in India. The section also looks at the rapid growth of advance pricing agreements (APAs) in Asia and includes APA statistics in Australia, China, Japan and Korea. Finally, the publication includes a discussion of two court cases that have significant implications for supply chain management and restructuring—the General Electric case in Canada and the Veritas case in the US.
“In many countries, the number of procedural options for resolving transfer pricing disputes is rising. The APA reports issued by Australia, China, Japan, and Korea all suggest vibrant and growing APA programs. Accelerated competent authority procedures in the United States and Canada are bringing more years into a single competent authority negotiation, which also can have the effect of resolving more recent years. Finally, mandatory arbitration provisions are being incorporated into a greater number of treaties, including those of the United States, Canada and the EU generally. In some cases, however, litigation appears to be the only answer where court decisions have been needed to resolve difficult transfer pricing issues,” concludes Fortier.
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