Many transfer pricing systems around the world are coming under unprecedented stress, as the global recession has forced companies and revenue authorities to reassess their economic expectations, finds a new study from KPMG’s Global Transfer Pricing Services group.
According to KPMG, some tax authorities, under pressure to provide revenue to their governments, may be reluctant to accept that formerly profitable companies are now incurring losses, and therefore paying less tax.
"This means that, to meet increasingly stringent tax authority requirements, taxpayers may have to find new ways to demonstrate that prices charged for inter-group transactions are appropriate," says KPMG.
A common problem highlighted by KPMG’s research has been the lack of comparable transactions to act as benchmarks for intra-group commerce, as economic activity around the world has slowed.
“For example, the problem has been felt very acutely in the area of related-party loans,” notes Kari Pahlman, Partner in KPMG China’s Transfer Pricing Practice in Hong Kong.
Pahlman explains that activity in the financial services sector fell to very low levels towards the end of last year and the beginning of this year, so it was difficult to find similar but unrelated transactions to determine what the open-market rate of interest might be.
He adds that details like creditworthiness of the borrower, country of the borrower, amount and currency of the loan and even security features and covenants have become much more important in determining supportable loan rates.
Pahlman says that many multinationals are experiencing significant transfer pricing issues in the context of their Asian operations. "Depending on how the recession has impacted operations, risks may arise in a form of reduced profits or local losses," says Pahlman, adding that confronted with authorities with fiscal revenue shortfalls, such situations may prove to be very difficult to manage.
On the other hand, Pahlman says that many multinationals have continued to perform, such as those in Greater China and, therefore, report profits locally. "This might often bring up tax inefficiencies in case the more mature markets in Europe and USA have fallen to losses. Revisiting transfer pricing may offer opportunities to mitigate such inefficiencies.”
Steven Fortier, Global Leader of KPMG’s Global Transfer Pricing Services practice, and partner in the US firm, says that the economic events of 2008 and 2009 are really testing the whole transfer pricing system.
“This is a system that has been developed over a period of increasing globalisation and prosperity," comments Fortier. "Now, it has to adjust rapidly to new, much more difficult conditions."
Fortier says that companies worldwide should take a careful look at the guidance from tax authorities, as well as what they do in practice, to help redraw their transfer pricing policies for a very different world economic climate. “They should also think beyond the present situation and try to make sure their pricing policies can meet their long term objectives in good times as well as bad.”