Increasing number of countries have introduced specific transfer pricing regulations for direct taxation purposes and focused resources on building capacity within their tax administrations.
companies on their transfer pricing.
One of the issues is that using public company data from where it's available and applying that to any region is no longer considered acceptable by many tax authorities. Outside of countries where there is plenty of public company information to pull from, tax professionals must now find a new source of local comparables data on private companies in response to more aggressive tax authorities.
Most of the public company data come from the U.S., UK, Germany, Australia and handful of other regions. This leaves the rest of the world--including difficult tax regions such as BRlCs--in a sort of dark spot when it comes to the availability of local data, if only public comparables data are being considered. Without local or regional comparables to work from, multinationals run the risk of penalties, double taxation and other audit issues that could cost plenty of time and money. A good comparables set is critical to achieving the highest level of practical comparability, and therefore having a solid case in any litigation or audit.
Dr. James Herald McClure, senior manager of transfer pricing at Thomson Reuters, helps illustrate this point further:
"As a simple example, suppose the typical distribution affiliate has $200 million in sales per year and that the multinational grants these affiliates with profit margins equal to 2 percent or $4 million per year If the foreign tax authority in one nation expects the profit margin should be 8 percent there is a possibility of double taxation on the difference of $12 million in that nation alone. Let's also assume that the typical contract manufacturing affiliate incurs costs equal to $500 million per year and is afforded profits equal to a 5 percent markup over these costs, or $25 million per year. If its local tax authority expects this markup to be 20 percent there is a possibility of double taxation on the difference of $75 million. The individuals in charge of navigating such disputes need access to similar financial information for regional third-party private companies to craft an appropriate position that would hopefully create a mutual understanding between...