Heightened government scrutiny leads to rapidly evolving transfer pricing rules and regulations

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According to KPMG International’s Global Transfer Pricing Review, this trend has heightened government scrutiny of transfer pricing matters, including issues such as attribution of losses, business restructuring, intellectual property migration and intercompany financing transactions.

“Globally, transfer pricing is a hot button issue for regulators and companies alike,” said Steven Fortier, leader of KPMG’s Global Transfer Pricing Services (GTPS) practice. “As globalisation widens the reach and ambition of multinational enterprises (MNEs), CFOs and tax directors face significant new risks in tax regimes with different rules and expanding requirements.

Since every cross-border intercompany transaction impacts two or more tax jurisdictions, and the local tax authorities may treat the same transaction differently, it is impossible to eliminate transfer pricing risk entirely. However, the risk can be mitigated by sound planning and good risk management principles.”

Tax authorities in the Asia Pacific region continue to heighten their scrutiny with new compliance initiatives, growing budgets for investigations, and a renewed emphasis on transfer pricing. While each jurisdiction has its own story, the general trend is increased standardisation of transfer pricing practices within each regime, and, to some degree, across the region.

One particularly important area of development is that of advance pricing agreements (APAs). The past decade has seen an increasing number of Asia’s tax authorities offering APAs, with several new APA programmes across the region at varying stages of development.

The number of APAs completed by Asia Pacific countries continues to grow, with close to 100 bilateral APAs being conducted per year by Japan and around 20 or 30 APAs per year concluded by Australia and Korea. The United States, for comparison, was concluding more than100 APAs per year in 2006 and 2007; however, this number has now fallen to around 70 per year.

According to Fortier, “Under the right circumstances APAs can be a viable way to manage transfer pricing risks. APAs can be time-consuming and expensive to complete, but they should be considered when they may create opportunities to realize an important objective such as removing uncertainty or achieving a given transfer pricing result.”

In Vietnam, the introduction of the new transfer pricing regulations – Circular 66/2010/TT-BTC dated 22 April 2010 of the Ministry of Finance, seems to have been an important trigger for the tax authority to embark on a series of actions to challenge companies’ transfer pricing practices, especially with respect to prolonged loss-making taxpayers. 

These range from requests for transfer pricing documentation to requests for explanations of companies’ disclosures of their unidentified transfer pricing method and prospective adjustments of transfer prices on a voluntary basis.

It is said that application of the transfer pricing regulations will be one of the key items on the revenue authority’s working agenda in the short to medium term to protect the tax base.

The latest developments highlight the urgent need for a taxpayer to defend and sustain their transfer pricing policy and methodology in tax audits, especially for the 2008 and 2009 years. 

According to KPMG’s Global Transfer Pricing team, the keys to companies confidently managing their transfer pricing issues include:

·        Planning: developing economically supportable transfer pricing policies and executing forward-looking tax planning with long-term tax benefits.

·        Implementation: developing and implementing effective policies, procedures, controls and systems for setting, monitoring and testing intercompany transactions.

·        Compliance and documentation: managing risk within the current environment of detailed transfer pricing regulations, strict documentation requirements, sophisticated audit practices and significant penalties for noncompliance.

·        Controversy: resolving transfer pricing disputes through APAs, competent authority negotiations, arbitration and litigation support.

KPMG International’s Global Transfer Pricing Review is compiled from information supplied by various KPMG member firm professionals who provide transfer pricing services. The review offers discussions and comprehensive overviews of transfer pricing compliance requirements in 64 countries.